Loans between individuals
In many cases informal loan arrangements are made between private individuals and especially family members and friends. In these cases when on paper, the movement of funds between the lender and the borrower is not associated with a specific consideration it is essential to evidence that a loan agreement between the parties exists as if not, the monies “lent” may be considered a gift which would lead to unwanted tax considerations and the possible taxation of the transaction.
Legally, what constitutes a gift and what constitutes a loan? Article 618 and the following articles of the Spanish Civil Code consider that a gift is made when there is a transfer of money without any consideration in exchange and when there is no obligation to reimburse the monies transferred. Loans are not subject to any specific requirements and they may even be of a gratuitous nature (i.e. interest free loans). Interest will only accrue on the monies loaned if there is a specific agreement between the parties. As such, the fact that a loan does not generate interest does not automatically mean that a gift has been made.
To be able to determine legally when a loan or a gift exists the wishes of the parties must be taken into account. Obviously, if the parties have recorded in writing the transaction and its nature, the written agreement between them will determine whether legally the agreement is a loan or a gift. However, in the absence of a written agreement and if the acts of the parties prior to, during and after the transfer of the monies do not evidence the clear existence of a gift, the accepted criteria is that the transfer of funds will be considered to be a loan.
However, what happens when a transfer of funds is made from an account with one sole account holder to an account held jointly by the said account holder and other persons? A resolution dated 16/9/2019 establishes that the mere fact that a current account is opened in the name of several persons on a joint and several basis implies that any of the account holders has the power to withdraw monies from the account. However, if one of the account holders actually makes a withdrawal or transfer of the funds from the account, consideration must be given to whether the said withdrawal constitutes a gift or a loan.
From a fiscal perspective the answer is not totally clear. In the absence of proof to the contrary, withdrawals or transfers from the account should be considered as loans. However, the said presumption would be challenged and the transaction would be considered as a gift if it were proved that the disposition of the funds was made by the receptor and that the transfer of the funds was made with either the express or tacit consent of the issuer of the account holder.
As a guideline, article 4.1 of the Inheritance and Gift Tax Statute establishes that the existence of a gift is presumed when from the fiscal registry or on the basis of the information that is held by the tax office there is a clear record of a reduction in the wealth of one person and a simultaneous or subsequent increase in the wealth of his/ her spouse, descendants or future heirs or beneficiaries within the term of the legal prescription of the tax.
As such, in the case of spouses and descendants, fiscal regulations presume that a transfer of funds constitutes a gift even when the acquisition is made by persons subject to legal representation and without prejudice of proof to the contrary. As such, to avoid potential problems with the tax office, and if a transfer of funds between close family members such as parents, children and spouses is not a gift, would be convenient for the parties take steps to document the transaction correctly by means of a deed granted before a Public Notary so that the nature of the transaction is perfectly clear and does not invite the tax office to attempt to charge the transaction incorrectly.