Exit Tax: A tax on financial migration

In an increasingly globalized world, the mobility of people and companies has become an everyday reality. However, this mobility can have significant tax implications. One of the most debated concepts in this context is the so-called “Exit Tax”. In this article, we will delve into this tax, how it works in Spain, and discuss the arguments for and against its application.

What is the ‘Exit Tax’?

The ‘Exit Tax’, also known as departure tax, is a tax imposed by some countries on natural or legal persons who decide to change their tax residence or domicile outside national borders. This tax is calculated based on the projected value of the assets or the capital gains that would be realized if all assets were liquidated before leaving the country.

In the case of Spain, this exit tax was implemented in 2014 through Law 26/2014 and is regulated in the Personal Income Tax Regulations. The main objective of this tax is to prevent tax evasion or tax reduction through changes of tax domicile.

How is the ‘Exit Tax’ applied in Spain?

The implementation of ‘Exit Tax’ may differ from country to country, based on specific tax laws. In the Spanish context, this tax is aimed at people who lose their tax resident status, that is, those who decide to change their residence to another country and stop being taxpayers in Spain. Such individuals are subject to taxes on unrealized gains from the shares they own in companies and shares in investment funds. For the Spanish Tax Agency, leaving the country has the same tax consequence as selling shares or participations in companies.

Furthermore, to be subject to the exit tax in Spain, several requirements must be met. It is necessary to have been a tax resident in Spain for at least 10 of the last 15 years. Also, the total market value of all shares or participations must exceed €4 million, or have a stake of more than 25% in a company whose market value exceeds €1 million.

However, in certain scenarios, it is feasible to avoid the exit tax in Spain even if these criteria are met. For example, in the case of transfers within the European Union (EU) or the European Economic Area (EEA), provided there is a double taxation agreement and exchange of tax information, it is possible to request the suspension of the exit tax. Likewise, temporary displacements for work reasons to a country that is not considered a tax haven, or if the country of destination has signed an agreement to avoid double taxation and there is a clause for the exchange of information, are exempt from this tax.

To determine the amount of the tax, reference is made to the market value of the shares or participations and their purchase value. In the case of listed securities or shares, the stock market value or its net asset value in the case of investment funds is taken as a reference. For unlisted shares, the market value will be the highest of the following: the net worth corresponding to the value resulting from the balance sheet of the last fiscal year, or the one resulting from capitalizing at 20% the average of the results of the three previous closed fiscal years to the date of accrual of the tax

Arguments for and against the “Exit Tax”

The “Exit Tax” is a topic of debate in many countries. Here are some arguments for and against its application:

In favor:

• Prevents tax evasion : The “Exit Tax” can be an effective tool to avoid tax evasion. By taxing unrealized capital gains at the time of emigration, countries can ensure that individuals and businesses do not move to low-tax jurisdictions simply to avoid paying tax.
• Tax equality : The “Exit Tax” can also be seen as a question of tax equality. If an individual or company has accumulated wealth in a country due to its infrastructure, education, security, etc., it could be argued that they have a moral obligation to help maintain those services, even if they decide to move elsewhere.

Against:

• Limits mobility : Critics argue that the “Exit Tax” can limit the mobility of people and companies. This lack of mobility can be especially detrimental in an increasingly globalized world, where the ability to move freely is often a necessity for growth and innovation.
• Double taxation : Another argument against the “Exit Tax” is that it can lead to double taxation. If the source country and the destination country tax the same capital gains, this can result in a disproportionate tax burden.

Conclusion

Ultimately, whether the Exit Tax is a good or bad policy is a matter of opinion and will depend largely on