Tax Treatment of Donations and Other Free Transfers
A free transfer is when the donor (transferor) bestows a benefit or right without being paid, even though the transfer may be subject to the fulfillment of certain conditions, such as an inheritance, donation, or prize. The taxpayer in this type of conveyance is the party who accepts the benefit or right (transferee) since they receive an income.
A donation deductible under article 39 of the Tax Agreement Law is exempt since it receives a different tax treatment. Our focus here is solely on transfers considered capital gains for the recipient.
As described in previous articles, we calculate taxes due using the tax base (value to which the tax rate applies) and the aliquot (tax rate or percentage).
The tax base for transfers is derived as follows:
MARKET PRICE minus TRANSFER EXPENSES = TAXABLE BASE
The expenses inherent in a transfer of value are legal fees, registration fees, and agency payments duly supported and promptly quantified with the appropriate supporting documents; the law does not recognize a presumed deduction.
Nor does the law allow the deduction of charges (pledges, mortgages, other encumbrances) that affect the goods or rights received, which may affect the MARKET PRICE.
Once the tax base is defined, an asset not subject to public record registration is liable for a 15% tax, while assets subject to registration (vehicle, real estate) pay taxes according to their value (1 to 7%).
How does the payment of this type of tax work in practice?
Although a donation of money is subject to withholding, there is no specific mechanism to withhold in cases where an object or right is conveyed rather than money.
In practice, the transferee can determine the amount to withhold and deliver it directly to the Tax Administration if the transferor does not withhold the amount due. The transferor may also request the transferee to pay the withholding amount in cash.