Every year, the biggest shareholder of Zara owner Inditex SA has to rapidly invest the billions of euros he receives from the world’s largest retailer of affordable fashion, or face the prospect of handing over a chunk of those proceeds in wealth taxes.
As the continued success of Zara swells Ortega’s coffers with ever-increasing flows of dividends, deploying that money quickly is becoming a challenge. Just last week, Inditex announced a 29% jump in its payout, handing the 86-year-old tycoon close to €2 billion ($2.2 billion).
Ortega, who controls 59% of Inditex, has to invest that amount within the year because of the legal and fiscal rules that govern family offices like his Pontegadea.
Spain, whose government is headed by the Socialist Party, is the only country in the European Union to have a full-on wealth tax. Under the nation’s law, wealthy residents are exempt from that politically controversial levy only if their family offices put their income to work within the 12-month window and in assets considered to be “economic activity.”
“It's quite unique because there are not many other similar examples in Spain with that level of wealth,” said Leon Fernando Del Canto, a London-based barrister who works with wealthy Spanish individuals.
Over the years, the tax constraint has resulted in Pontegadea plowing Ortega’s Inditex dividends — more than $12 billion since the company’s 2001 initial public offering, data compiled by Bloomberg show — into carefully chosen assets, mostly urban real estate.
The purchases have given Ortega such iconic properties as New York’s Haughwout Building, the Southeast Financial Center in Miami, Toronto’s Royal Bank Plaza and The Post Building in London. Other assets have left him with prime residential and commercial real estate in cities from Barcelona to Seattle — buildings that count Facebook, Amazon.com Inc., Zara, and even rival Hennes & Mauritz AB among tenants.
To avoid paying the wealth tax, family offices like Pontegadea can buy assets such as real estate and energy infrastructure or stakes of at least 5% in publicly listed companies. Mutual funds and cash aren’t considered “economic activity” and don’t qualify. If they can’t invest all of the dividends within the year, the wealth firms can negotiate an extension as long as they can prove they’re close to sealing a deal for a part of the receipts.