The recent floods in Valencia have mobilized hundreds of people to help affected residents rebuild their lives. However, many of these generous donations between people without family ties can lead to unexpected tax consequences that both donors and recipients are unaware of. The Inheritance and Donations Tax (ISD) in the Valencian Community applies significant taxation to such donations, especially when they are made between people with no familial relationship, a regulatory aspect that, in effect, limits private initiatives and encourages aid to be channelled through specific entities.
¿What is the ISD, and how does it affect donations between non-relatives?
The ISD taxes donations and inheritances based on the relationship between the donor and the recipient. When a person receives a donation from someone with no family ties, like a friend or acquaintance, the tax rate is significantly higher, reaching up to 70% of the donated amount in the Valencian Community. Ultimately, this rule forces non-family members who want to help to face significant tax burdens, thus encouraging donations through authorized charities or foundations.
Examples of how it can impact DANA donors
Imagine a person donates 10.000 euros to a friend affected by the DANA. Since the recipient is not related to the donor, they could be required to pay up to 1.700 euros in taxes. Depending on the donation amount and personal circumstances, as much as 7 out of every 10 euros donated could go towards taxes. This not only reduces the effectiveness of the aid but also places an unexpected tax burden on the recipient at a critical time. Thus, the regulation indirectly acts as a deterrent for direct donations and aims to channel donations through State-authorized entities (public-interest foundations and associations).
Alternatives to minimize the tax impact
To avoid this burden, several alternatives benefit both donors and recipients:
Donations through ONG or foundations
Officially recognized non-profit organizations and foundations are exempt from the ISD, and donors can deduct up to 80% of their contributions on their personal income tax if these organizations are accredited. This approach not only reduces the tax burden but also aligns with the regulation promoting aid distribution through controlled institutions.
Usage assignments and in-kind donations
In some cases, the transfer of goods without compensation or in-kind donations can help reduce the impact of the ISD. However, these types of donations are subject to restrictions and are often more effective when made through specific entities.
Donations made by a company
If a donation is made by a company to an individual, the tax impact is doubly burdensome. In addition to the ISD impact on the recipient, the donation will not be tax-deductible for corporate tax purposes. To limit this impact, it is necessary once again for the donation to be made to entities that comply with Law 49/2002 (foundations and associations declared to be of public utility).
Stay informed and avoid tax surprises
Donations are a great way to help, but understanding the tax implications is crucial to avoiding problems. The current Spanish regulation, especially in the Valencian Community, restricts private initiative and control.
Before donating, consult a tax advisor to ensure that your aid reaches its destination effectively. While the current regulation may aim to ensure transparency in aid, your good intentions could be taxed if not managed properly.
