Accumulating or distributing funds: when Spain taxes reinvested income

Key rules

• Accumulating funds: Reinvested income in an accumulating fund or UCITS ETF is not taxed until you sell.
• Distributing funds: Dividends are taxed in the year you receive them.
• Tax-haven funds: You are taxed each year on a deemed income of 15% of the fund's gain in value, even without selling.
• Offshore funds: A non-UCITS fund outside a tax haven is taxed on sale as a savings-base gain.

Do you pay tax on reinvested income before you sell?

For most funds, no. If you are a Spanish tax resident and hold an accumulating fund or an accumulating UCITS ETF, the income stays inside the fund and is not taxed each year. Tax comes when you sell or redeem the units. The gain is then taxed in the savings base, which is the part of your income tax return for investment income and gains.

A UCITS fund is a fund set up under European rules for ordinary investors. Most mainstream European funds and ETFs are UCITS.

How distributing funds differ

A distributing fund pays out dividends. You are taxed on them in the year you receive them, even if you spend them or reinvest them yourself. You are taxed again on any gain when you sell.

If you want to postpone tax, an accumulating fund does that. If you want regular income, a distributing fund gives it, with tax each year.

Offshore and non-harmonised funds

A fund that is not a UCITS, or is based outside the EU, is called offshore or non-harmonised. If it is not in a tax haven, it is taxed on sale as a capital gain in the savings base, like other funds. The decision below helps you compare your options.

Funds in a tax haven: the exception

Funds based in a tax haven are treated differently. You do not wait until sale. Each year you must add a deemed income to your savings base. It equals 15% of the difference between the fund's value at year-end and what you paid for the units. This is a deemed income, so you pay tax on it even if you receive no cash.

The deemed income is then added to the cost of your units. That stops you being taxed twice when you sell.

Avoid these funds unless you have taken advice. Check the fund's country of domicile before you buy.

Foreign assets may also need a report

Holding funds abroad may also require a separate declaration of foreign assets, known as Modelo 720. Ask a Spanish tax adviser whether it applies to you.

The FAQ below covers switching between funds and other common questions.

Choosing between options

Should you hold an accumulating fund or a distributing fund, and when does Spain tax each?

• Accumulating fund or UCITS ETF: Choose it if you want to defer tax. Income reinvested inside the fund is not taxed until you sell or redeem the units, then the gain is taxed in the savings base.

• Distributing fund: Choose it if you want regular income. The dividends it pays are taxed in the year you receive them.

• Fund domiciled in a tax haven: Be careful with this one, whether it accumulates or distributes. You are taxed each year on a deemed income of 15% of the gain in the fund's value, even if you sell nothing.

If the fund is an accumulating UCITS, you pay nothing until you sell. If it is an offshore or non-harmonised fund, you are also taxed on sale as a capital gain, unless it sits in a tax haven, where the yearly deemed income applies. Distributing funds are taxed on every payout.

Frequently asked questions

Do I pay tax every year on a fund in a tax haven?

Yes, a fund domiciled in a tax haven is taxed every year on a deemed income of 15% of the difference between its year-end net asset value and what you paid. That deemed income goes in the savings base. It is then added to the cost of your units, so you are not taxed twice when you sell.

How is an offshore fund taxed if it is not in a tax haven?

An offshore or non-harmonised fund outside a tax haven is taxed on sale as a capital gain in the savings base, like other funds. You pay nothing on the income it reinvests along the way. Ask a Spanish tax adviser to confirm where your specific fund is domiciled.

Do I pay tax when I switch from one accumulating fund to another?

Check with a Spanish tax adviser before you switch, because the answer depends on how the switch is structured. What is certain is that the gain is taxed in the savings base when units are sold or redeemed, not while the fund reinvests.