The Ultimate Guide to Navigating Modelo 720 for Expats Living in Spain
What is the Modelo 720
If you’re an expat living in Spain or considering a move there, it’s essential to understand the Modelo 720 declaration process. The Modelo 720 is a tax form that Spanish residents are required to complete to report their foreign assets. Failure to report these assets can result in steep fines, so it’s crucial to ensure that you comply with the rules.
Who needs to complete a Modelo 720?
It’s compulsory for those who are tax residents of Spain and own assets in countries other than Spain exceeding €50,000 in one of the following categories:
- Accounts held with financial institutions (banks);
- and immovable property.
But don’t worry, if your assets in each category are less than €50,000, you don’t need to submit a report. And you don’t need to submit a report if you’ve previously submitted a Modelo 720 form and:
- your assets haven’t grown by €20,000 or more;
- you haven’t sold an asset or closed an account;
- and you haven’t obtained any new assets.
When filling out the Modelo 720 form, you only need to declare assets located outside Spain. The deadline to submit the form is March 31st of each year, covering the assets you owned at the end of the previous year.
What happens if you fail to comply with the Modelo 720?
The Modelo 720 was introduced after the financial crisis to prevent tax fraud – and the Spanish government went heavy on the consequences.
The penalties for not submitting this form or under-declaring assets used to be incredibly harsh. But, recent changes to the penalty regime following a European Court of Justice ruling in 2022 have made it much more proportionate.
The new penalties for filing incompletely or inaccurately are now much lower. There’s a fixed pecuniary fine of €20 for each omission or error (it used to be €5,000!) and a minimum penalty of €300 (once €10,000!). There’s also a maximum penalty of €20,000 – previously it was uncapped. These penalties will be reduced by 50% if you file after the deadline but before receiving notification of non-compliance.
A few extra points about Modelo 720 penalties
It’s important to note that penalties will be doubled if undeclared assets are located outside the European Union. But with the new penalty regime, the maximum penalty for undeclared foreign bank accounts is now just €300 (or €600 if outside the EU).
Another important change is that there’s now a four-year statute of limitations. This means the tax authorities cannot fine you for more than the last four tax years.
To give you an idea of just how brutal the Modelo 720 tax rules used to be: if you failed to declare an asset like a foreign bank account, you’d be looking at an eyewatering penalty of €25,000. The penalty now looks more like €300-€600. A lot more reasonable – still, you’ll want to avoid falling foul of the Modelo 720.
How does the Modelo 720 affect expats in Spain?
If you’re a non-resident in Spain, you don’t have to complete the Modelo 720 declaration form – but that could change soon. Proposed changes to the non-residency rules are causing many expats to reconsider their options. More on that in a minute.
If you currently are or decide to become a full tax resident in Spain, you’ll have to complete the Modelo 720 declaration form each March.
So, whether you’re a non-resident or considering becoming a resident, it’s important to stay up-to-date with the latest changes to the non-residency rules and the Modelo 720 declaration process. With the right financial planning and guidance, you can ensure that you’re in compliance with the Modelo 720 declaration process. You’ll also be able to take advantage of all the available wealth management and tax planning solutions for expats in Spain.
What do the proposed changes to Spanish residency requirements mean for global expats in Spain?
Currently, non-residents can spend up to 182 days per year in Spain and remain tax residents elsewhere. But soon, that will change.
Under the new rules, non-residents will be allowed to spend a maximum of 90 days in Spain in any 6-month period. This means that if you want to spend more time in your Spanish home, you’ll need to become a resident of Spain.
What’s more, if you spend just one month in Spain during the first 6 months of the year, you won’t be able to carry forward the unused part of the 182-day maximum period. That means you’ll be limited to spending a maximum of 4 months in Spain without a residency permit.
It’s important to keep track of your days spent in Spain to avoid any potential fines or penalties. If you’re considering becoming a resident in Spain, it’s a good idea to work with a financial adviser who has experience working with expats to help you navigate the new rules and make informed decisions about your financial planning.
Modelo 720: The good, the bad and the ugly for expats living in Spain
The obvious downside of the Modelo 720 for global expats in Spain is the potential for significant fines.
The other downside is there’s nowhere to hide.
The Modelo 720 declaration may not be a tax return, but it gives the Hacienda a record of our assets and their values. If you don’t declare these assets on your annual tax return, you may face questions.
The Common Reporting Standard (CRS) adds to the concerns of those who have managed to stay under the radar. The CRS is an information-sharing agreement used to eliminate tax avoidance and evasion on a global scale. Spain has adopted the legislation, along with France, Germany, the UK, South Africa, India, and many more.
This table from the OECD will give you a quick look at the current CRS implementation status of all committed jurisdictions.
Where’s the good news?
While you can’t avoid the Modelo 720 if you have overseas assets while resident in Spain, the good news is that there are ways to reduce the amount of tax you pay.
For instance, there are generous allowances available for property rental income and expenses. If you structure your pension drawdown, inheritance tax mitigation strategies, and investment plans correctly, you can set yourself up for financial success.
Let’s take a closer look at UK ISAs and how they’re treated in Spain. While ISAs are a great investment tool, they lose their tax-efficient status once someone becomes a Spanish tax resident. You’ll need to include them in your Modelo 720 declaration and annual tax return, and they may be subject to Spanish tax.
Fortunately, there’s a simple solution: transfer your funds into a Spanish Compliant Investment Bond (SCIB). SCIBs are similar to ISAs in that no tax is payable on investment growth if no withdrawals are made. The tax consequences are also minimal and manageable when you draw income from the investment.
For further reading, check out our blog about how to invest in Spain.
We have a whole blog dedicated to why you need an international financial adviser, if you’d like to read that you can find it here.
We’ve helped many expats navigate their tax declaration and ensure compliance this March. But, that’s not all. We’ve also helped them to restructure their investment portfolios and bank accounts to achieve tax efficiency. By investing in products that make the Spanish tax authorities happy, you can minimise your tax liability. Which makes you happy! If that sounds like a good idea to you, then get in touch with us today.