Within the framework of the “anti-fraud” plan launched in 2013, the Spanish government imposed the obligation for Spanish tax residents to declare all their foreign assets through model 720. This reporting obligation was mainly directed  to discover assets of Spanish citizens with irregular assets located offshore. However, it also directly affects the members of the international community living in Spain that have assets abroad.

The duty to inform through the 720 model is linked to the tax residence, that is, if the person is considered a tax resident in Spain, you are subject to this obligation of reporting foreign assets.

  1. What is Model 720?

It is a merely informative filing but its content is of special interest for the Spanish Tax Authorities to exhaustively control taxpayers assets’ and its variations. In fact, its oversight is a considered as a priority in the Spanish Tax Authorities’ control plan.

  1. Who is Subject to Model 720?

Any person, corporation or permanent establishment who qualifies as a Spanish tax resident in Spain and is the owner, titleholder, representative, authorized person, beneficiary, or has disposal powers of assets located outside of Spain worth more than €50,000 (see assets below), must report the value of these assets.

  1. When is a Person a Spanish Tax Resident?

A person will become as a Spanish tax resident if any of the two following circumstances are met:

  • (i) The person is physically present in Spain for more than 183 days in the specific calendar year. Sporadic absences are considered as days spent in Spain for computing this period, unless tax residence in another country for more than 183 days can be proved. This proof must be in the form of a certificate from the other’s country tax authorities confirming such tax residence.
  • (ii) The person has his/her center of vital interests or economic interests in Spain, either directly or indirectly. There is a presumption that a person has his/her center of vital interests if his/her legal spouse or minor dependent children are tax residents in Spain.
  1. What to Declare?

There are three main groups of assets that must be declared if the total joint value of the group exceeds 50,000 euros:

  1. Funds in accounts in financial institutions abroad: such funds can be held through the figure of the owner, co-owner, representative, authorized or beneficiary. The valuation of the funds should be the highest of (i) the balance at December 31 or (ii) the average balances at the closing of each quarter.
  2. Securities, rights, insurance and income deposited, managed or earned abroad. Life insurance policies and temporary or lifetime income generated from lending money, rights or other assets to foreign entities are included, whilst pension plans and stock options are excluded.
  3. Real estate and rights over real estate located abroad.

It is worth noting that once the limit of 50,000 euros is surpassed for a group, all assets in such group need to be declared regardless if each asset does not pass the limit. Additionally, the obligation to report exists where the specific asset(s) are over 50,000 euros regardless of how many holders/owners hold a particular asset(s). Each holder/owner should declare the total balance/value (not the pro-rated), indicating the percentage held/owned.

  1. When to Declare?

The reporting period is between January 1 and March 31 of each calendar year, with respect to assets held as at 31 December of the previous year. For example, the reporting period for assets held as at December, 2017 is until March 31, 2018.

  1. Frequency to Report?

Form 720 only has to be filed once if the person meets the conditions described in question 2 above. The person will only be obliged to file Model 720 again when in relation to any of the three groups of assets, there is an increase of 20,000 euros compared with what was declared in the last Model 720 filed.

  1. How to Report?

The form is to be completed on-line. The form is not a standard format and requires navigation through various options and drop down menus. Assistance from an experienced advisor is recommended.

  1. Penalties

 The consequences for failing to file Model 720 in time or filing it at all are very severe. The specific penalties are as follows:

(i) Penalties for late report: The penalty for voluntary late submission is 100 euros per item declared and a minimum fine of 1,500 euros for each group of assets.

(ii) Penalties for failure to report: The penalty for failing to file Model 720 is 5,000 euros per infraction with a minimum fine of 10,000 euros for each group of assets.

Additionally, the undeclared assets will be treated as unrealized capital gains and will be consequently included in the general base of the income tax return (Impuesto de la Renta de Persona Físicas) for the earliest year of such tax not prescribed. Finally, interests and an additional penalty of 150% paid income will also be levied.

The regulation establishes that declaring late the formal penalty is much lower (€ 100 x data, with a minimum of € 1,500 per group of goods) than by not declaring or doing it incorrectly (€ 5,000 x data, with a minimum of 10,000). €), but the other two possible sanctions or consequences are the same both for not declaring and for doing it out of time: the Administration can attribute as unjustified patrimonial gain the value of the goods abroad in the IRPF of the last year not prescribed (2012), and additionally apply a sanction of 150% on the resulting IRPF quota, unless it can be clearly demonstrated that the goods abroad correspond to income declared or obtained when one was not resident in Spain.

Take, for example, a person who invests in 4 accounts and 15 securities abroad and owns € 330,000 at the end of 2012, and considers their regularization out of time before the Spanish treasury.

– formal penalty 2012 = 4 accounts x 5 data = 20 data x 5000 = € 100,000

-formal penalty 2012 = 15 values ​​x 2 data = 30 data x 5000 = 150,000 €

(and if in subsequent years 2013, 2014, 2015 it was also obliged to declare for increases in balances exceeding 20,000, or for cancellation of accounts or sales of securities, the Treasury could also apply those formal penalties for these other exercises)

-IRPF 2012 = 330,000 x type approx. 50% (165,000) + interest (20,000) = 185,0000 €

-Penalty 150% on IRPF quota = 165,000 x 150% = € 247,500

It is worth noting that the penalties will apply even if the statute of limitations for other tax filings and obligations relating to those assets (and incomes) has expired as the statute of limitations does not apply to Model 720.

However, if the tax payer can prove that the funds came from income earned whilst he/she was not a Spanish tax resident, or that the funds came from taxed income, the income tax and income tax penalties will not be levied. In case of a tax inspection, it is thus extremely important to present a detailed and backed-up response and justification to prove the assets were obtained before becoming a Spanish tax resident or that they have been subject to taxation by a foreign tax authority.

  1. EC’s response to Model 720

In November 2015 the European Commission (EC) started an infringement procedure against Spain confirming that there are two aspects of the Model 720 that may violate EU legislation: (i) the disproportionate sanction regime, and (ii) the imputation as unjustified capital gains of assets not declared on time, without the possibility of claiming the expiration of the statute of limitations. The EU Commission requested Spain to amend such regime. However, up to this date, Spanish Tax Authorities have not modified any aspect of Model 720 per the EC’s recommendations and have continued to strictly apply Model 720 and its penalties.

Given the obligations under 720, its severe penalties and the increasing automatic exchange of information treaties between States, we strongly recommend to clients to seek advice to analyze if they are subject to Model 720 and make the appropriate filings if so.