Gift Tax on the Balearic Islands

When is Balearic Inheritance Law Applicable?

Until 2015, the autonomous law of the Balearic Islands only applied if there was a direct connection to the region, which resulted in many Germans being excluded from its provisions. However, this changed as of 1 January 2015. Now, in most cases, heirs can choose in favour of Balearic law, which offers numerous advantages and benefits. This option provides greater flexibility and can often lead to significant tax relief.

Is Spanish or Balearic Gift Tax Law Applicable?

The autonomous community of the Balearic Islands has exercised its legislative authority in the area of inheritance and gift tax by enacting special regulations. These regulations complement the general Spanish tax law and often provide more favourable conditions for taxpayers. The Balearic laws take into account the particular needs and circumstances of the region and its residents, thereby creating a beneficial legal environment.

How is Gift Tax Generally Determined?

When a gift or other property transfer subject to Spanish gift tax are made, heirs in tax categories I and II are required to pay a flat rate of 7% on the value of the gift in tax.

What are the Tax Deductions?

• Tax Category I and II: children, spouses, grandparents, and grandchildren are entitled to a 100% deduction on the tax liability.
• Tax Category III: siblings as well as nieces, nephews, uncles, and aunts are entitled to a 50% deduction if the deceased had no descendants, or if the latter were disinherited.
• All other persons in this tax category are entitled to a 25% deduction.

What are the Tax Obligations for Gifts Made on the Balearic Islands?

In addition to gift tax, a capital gains tax on the transfer of assets will also be due. In Spain, all capital gains are generally taxed. When real estate is being transferred, a municipal increment value tax will be levied by the local municipality. This tax is based on the official increase in the value of the property between the time of purchase and the time of transfer. It is calculated in accordance with the cadastral value of the land, which is determined by the respective municipality. However, this tax will only be levied for a maximum period of 20 years.

Is there Double Taxation in Germany?

If either the donor or the donee are Spanish taxpayers, German gift tax may be incurred in addition to Spanish gift tax. In such cases, double taxation can often be avoided or mitigated by means of offsetting. Since there is no double taxation agreement between Germany and Spain for inheritance and gift tax, the offsetting will be based on the respective national provisions.

Is it Necessary to File a German Tax Return?

If there are links to Germany, German gift tax may also be incurred. According to Section 30 of the Inheritance Tax and Gift Tax Act, the donee must report any gift to the tax office responsible for administering the inheritance tax within three months of becoming aware of the acquisition. The tax office may demand that each party involved in the gift-giving transaction file a tax return within a specified period. This period may be extended upon request.

When is Gift Tax Due in Germany?

Gift tax in Germany is due within one month after the tax assessment notice has been issued.

CPA Nyikolaj Szmolenkov M.A.