One of the main attractions of the Spanish stock market is that many companies are paying high dividends (4.5% yield on average), and up until now investors did not have to pay taxes on the first 1,500 euros every year.
But new developments with Spanish tax reform laws are about to change that. Starting now, all dividends will be taxed at a new fixed rate set by the government. Every cent will be taxed, and there will be no exceptions.
Now that the exemption is going away, small investors in Spain can say goodbye to their model portfolios. Here is an example. If a shareholder has 30,000 shares or fewer in the five biggest stocks by market capitalization spread out in 6,000 share holdings in Santander, Inditex, Telefónica, BBVA and Iberdrola, they were earning around 1,460 euros per year in tax-free dividends.
New reforms mean that a portfolio like this, which earns less than 6,000 per year in dividends, would have to pay around 20% in taxes on dividend earnings in 2015 and 19% starting in 2016. For profits between 6,000 euros and 50,000 euros, the new rate is 22% for 2015 and 21% starting in 2016. For big dividend payouts of 50,000 and beyond, the rates are 24% and 23%, respectively.
Up until now, investors benefitted from no taxes on the first 1,500 euros provided that they bought and held shares two months before and after the dividend payment took place. This rule prevented a practice called dividend washing, which erodes a nation's tax base.
A measure that goes against the grain
This change will affect many investors who are looking for periodic cash inflows from their investments. "The reform's small print is trying to take back some of the money that taxpayers were given through recent income tax cuts, and these investors will lose a solid source of cash and investment capital," said Félix González, a partner at Capitalia Familiar.
The measure, in fact, goes against the government's efforts to help people boost their earning power. "How can we tell future pensioners that they should save for retirement and then take their savings through these taxes" If the personal savings rate is to go up, we need conditions that will allow it to. Unfortunately, this reform is not geared toward the taxpayers, but a strategy for the government to raise money. Critically, it goes against the philosophy that the government has been preaching,? said Javier Flores, a spokesperson from the analysis company Asinver.
For his part, the Finance Minister said that "there is no fundamental reason to justify having this tax exemption" and that "the impact will be countered by new rates." But some experts think that there is a reason to not tax dividends, because they could end up being taxed twice. Companies already pay taxes on their revenues, which flow through to investors, who end up paying taxes on the same money.
The only good thing about the reform is scrip dividend, which is when companies give shareholders the option to take their dividend in more shares. Although this policy dilutes the value of what shareholders have because the companies end up creating new shares in order to issue scrip dividend, at least shareholders don't have to pay taxes on a cash dividend.
