Spanish SICAVs have been under discussion for quite some time but the final outcome now seems closer than ever.

Although details remain scarce as to how politicians plan to modify the legal and tax treatment of this vehicle, all the main political parties have already agreed on legislating against its use as a planning solution for wealthy clients. Furthermore, other similar savings vehicles offered from Luxembourg or from elsewhere could be subject to international tax transparency rules and are also under scrutiny. The time has come, therefore, to consider what should be the next steps for those clients currently investing through Spanish SICAVs or similar foreign structures.

SICAVs have historically been an attractive wealth planning solution as they allowed investors to influence the investment decisions taken by the Investment Manager of the SICAV while benefitted from an advantageous tax regime in terms of Personal Income Tax (i.e. full tax deferral on any income realized by the SICAV structure) in spite of the fact that the SICAV itself was taxed at 1%.

In the current climate of uncertainty, some clients, together with their advisors, are considering the transformation of their SICAVs into ordinary Spanish companies such as Sociedades Anónimas (S.A.) or Sociedades Limitadas (S.L.). Although company transformations such as these would afford investors to continue having power over investment decisions, the tax exposure of any income generated annually within the company structure would be increased considerably from 1% of the SICAV regime to 25% - which is the ordinary Spanish Corporate Income Tax rate.

Other options include merging SICAVs with Spanish and non-Spanish UCITS funds or other Collective Investment Institutions under tax neutrality in order to keep the same advantageous tax treatment going forward (mainly, tax deferral). However, the response provided by the Spanish Tax Authorities in May this year to a Binding Consultation (published in Cinco Días on 20 October 2016) seemed to offer a challenge.  It stated that if the main goal of a merger is to benefit from the tax neutrality of corporate transformations and to defer Personal Income Tax exposure by the client on the transfer, then this special regime and the benefits related would not be granted by the Tax Authorities. The response further stated there would be no valid economic reasons for such mergers and that these would mostly be regarded as tax-driven transactions.

That said, we know little at the present time about how the SICAV regime will be re-shaped by the legislators but what is certain is that SICAVs will no longer provide clients the benefits they were originally promised. It is, therefore, an appropriate time to reflect and re-assess clients’ overall wealth planning solutions even if that means having to pay taxes while dismantling the current structure.

Many of those who liquidate their SICAVs may well choose to re-invest in UCITS portfolios even if that involves relinquishing discretionary investment powers.  These investors will continue benefitting from a similar tax regime: for instance, a 1% tax rate applied annually at fund level for Spanish UCITS funds and full tax deferral - even if the client decides to switch between UCITS funds - thanks to the so-called Spanish Transfers Regime (Régimen de Traspasos). However, those clients seeking to maintain investor control will definitely avoid this option and choose to invest through ordinary companies even if that option incurs a higher annual tax exposure.

In many other cases, clients will probably move into alternative wealth planning solutions such as unit-linked life assurance contracts where a high degree of flexibility exists for the policyholder in terms of financial and succession planning.  The main advantage of a life assurance solution is the flexibility to tailor precisely the financial needs, tax situation and inheritance preferences of each client and to the individual’s own personal and family circumstances.

From the point of view of inheritance planning, unit-linked life assurance policies are widely recognised for their flexibility and ability to adapt to changing circumstances, enabling policyholders to design and organise the transfer of their wealth in accordance with specific instructions which can be changed at any time during the lifetime of the policy. This is particularly attractive for cases involving complex family relationships, changes of residence, beneficiaries who are not of legal age, etc.

And finally, unit-linked life assurance policies also make for efficient tax planning:

• Spanish Personal Income Tax (Impuesto sobre la Renta de las Personas Físicas) - tax deferred until the policy is partially or totally surrendered by the client, or no tax paid by the policyholder on death if the policy value is paid to the beneficiaries.

• Spanish Inheritance and Gift Tax (Impuesto de Sucesiones y Donaciones) - tax deferred until the moment when beneficiaries are granted the right to access the value under the policy or no tax applied if the beneficiaries are not Spanish tax resident and the policy is executed outside Spain.

• Spanish Wealth Tax (Impuesto sobre el Patrimonio), recently extended sine die - possible exclusion of the value of the policy from the taxable base in most Spanish regions.

Whatever is the preferred solution for a client, one thing is certain:  it is unquestionably a time of change in Spain and clients will need to be advised properly as to what their next steps should be in order to structure their wealth in a fully compliant manner that fully meets their financial, tax and succession planning expectations.


By Pablo Peciña and Gonzalo García Pérez


If you have any questions or require further information, please contact your usual Lombard International Assurance representative.