NATIONAL PUBLIC DEBT

The taxation of fixed income is quite complex due to the different scenarios involved, both in the national and international markets.

Individuals

In the case of individuals, the returns, whether implicit or explicit, are treated as income from movable capital for the year in which the payment of coupons or the transfer or redemption of the security occurs. This income is then included in the taxable savings base.

In the case of interest (coupons, i.e., explicit returns), for the full amount received.

In the case of redemption or transfer (implicit returns), for the difference between the transfer value and the acquisition value, taking into account the inherent costs of acquisition (which increase the value) and of transfer (which reduce it).

The returns are taxed according to a progressive rate from 19% to 30% and the withholding tax applied is 19%, except in the case of:

Treasury bills, whose returns are not subject to withholding tax.

Returns derived from the transfer (sale) of fixed income securities before maturity. The amount of the coupons paid is subject to withholding.

Legal entities

Without prejudice to the taxation based on their accounting and tax treatment (usually 25%), legal entities are exempt from withholding tax on the income derived from assets traded in Spanish secondary markets or in an OECD state, provided that in the latter case the securities have been placed abroad.

Non-residents without permanent establishment.

In this case (the recipient of the returns is a non-resident individual or entity without a permanent establishment in Spain), if the issuer is also a non-resident there would generally be no taxation or withholding in Spain. If the issuer is Spanish or if the returns are otherwise understood to be located in Spain, the income is subject to the IRNR (non-resident) tax at the rate in force at any given time (generally, 24%), except in the case of a double taxation agreement that establishes a lower rate or if the recipient is exempt because they reside in another EU member state, provided the returns are not obtained through countries or territories designated as tax havens under Spanish law.

Likewise, income derived from the transfer of assets carried out in any of the official Spanish secondary securities markets will be exempt from taxation in Spain when obtained without a permanent establishment by residents of a country that has signed a treaty with Spain to avoid double taxation with an information exchange clause, and provided that the income is not obtained through countries or territories designated as tax havens.

Investments in US issuances

According to the rules approved by the US tax authorities, Bankinter must obtain from all customers who have investments in US securities sufficient documentation of their status as a resident or non-resident in the US. Accordingly, such customers must sign the relevant certificate (W8 or W9) to be eligible for more favourable tax treatment, reducing tax withholdings on interest and dividend payments.

Fixed income is a form of financing used by governments and corporates to raise money. They do this by issuing debt that is then purchased by investors.

Primarily, this form of financing is used because it tends to be the cheapest option. A corporate that needs money can choose between increasing its capital (by bringing in new partners) or taking out a loan from a bank, but both options have drawbacks.

By contrast, issuing debt in financial markets allows corporates to obtain funds more easily and, in many cases, more cheaply than through a bank loan. Similarly, governments issue public debt to obtain funds from investors, whether large institutions or private individuals, in order to finance their projects and expenses.

When an individual purchases fixed-income securities, they are essentially lending money to the issuer (a corporate or government). In return, the issuer undertakes to repay the capital on a specific date, plus interest that is fixed from the time of issuance.

There are different types of fixed income depending on who issues the debt and the term:

• Treasury bills: These are short-term debt issued by the government. They mature after a few months and are purchased for a price lower than their final value. Upon maturity, investors receive the full amount. Treasury bills are liquid products and are considered very safe.
• Government bonds and debentures: These are medium- and long-term debt issuances. They pay periodic interest called coupons and upon maturity they return the invested capital. Bonds usually have shorter maturities, while long-term debentures have maturities of more than 10 years. Since they are issued by the government, they offer high security and liquidity.
• Corporate promissory notes: This refers to short-term debt issued by corporates. They don't pay periodic interest but are purchased at a discount and the total is collected upon maturity. They offer higher returns, but also more risk than government debt.
• Subordinated debentures: These are hybrid products, part debt and part shares. They have maturity dates and pay interest, but if the corporate that issues them encounters problems, other creditors take preference. These products therefore entail a greater risk.
• Convertible debentures: These allow you to exchange debt for shares of the issuing corporate under certain conditions.
• Covered bonds: These are fixed-income securities issued by banks and backed by a pool of mortgages, which provides them with greater security.