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Introduction

Taxation in Spain occurs at a national level and at a regional (‘Autonomous Community’) or municipal level. The Spanish taxation system was subject to a significant review in 2007 that resulted in the introduction of a new Personal Income Tax Act. The tax regime in Spain is controlled by the Ministry of the Treasury.

Tax year

 1st January to 31st December.

Assessment Basis

Spanish residents are taxed on their worldwide income (earned and unearned), capital gains from all sources and on their worldwide assets. Spain operates a self-assessment regime. For personal income tax purposes, married couples may choose to file tax returns jointly or separately.

Income Tax

Spanish residents are subject to Spanish Personal Income Tax (‘IRPF’). Individuals and couples benefit from personal allowances which reduce their liability to tax and which increase in line with the number of dependent children.

A new structure has been created for the taxation of income, which now falls into two categories: the general base and the savings base of income.

The general base includes salary and other benefits from employment, income from economic activities, and property rental income (either actual or deemed). Such income is reduced by applicable deductions and allowances. It is subject to a progressive scale which is applied to successive portions of taxable income with rates ranging from 24% to 43%*.

The savings base is subject to a 19% tax rate on savings income up to €6,000 and to 21% on the excess and includes interest, dividends, and capital gains/losses paid to residents in Spain, together with life and disability insurance proceeds paid to Spanish residents by a Spanish entity (or an EU insurer operating on a Freedom of Services passport into Spain) where any investment element is limited to Spanish tax compliant funds.

*Some Autonomous Communities have considered increasing the local personal income tax rates to help combat the economic crisis in Spain. The following maximum rates for personal income tax have been agreed for the 2011 tax year e.g. Andalucia: 48%; Asturias: 48.5%; Cataluna: 49%.

Taxation of Investment Income

Any investment income received will form part of the taxpayer’s income tax calculation and any withholding tax deducted will be held as a credit against the final calculation of income tax due.  Spanish insurers and EU insurers with a Spanish branch or operating on a Freedom of Services passport in Spain are required to withhold 19% tax on gains on payments from tax compliant insurance policies held by Spanish residents. Foreign insurance policies will be subject to income
tax, and can offset losses, on an annual basis.  Generally an annual exemption limited to €1,500 is granted to resident individuals in respect of all dividends.  Premium Taxes Life insurance in Spain is exempt from premium taxes.

Tax on Property Rental Income

Property income (provided it is not used for economic activity) is taxed as general base income. The amounts received are the gross income and may be reduced by deducting all expenses necessary to service and repair the property. These can include interest on loans used to acquire the property, depreciation expenses of up to 3% of the purchase price or its cadastral value, excluding the value of the land. There are further reductions that can be made where the property
is destined to become the individual’s personal residence.

Wealth Taxes

Wealth tax was technically abolished with effect from 1 January 2008. An allowance equal to 100% of the wealth tax due has been introduced and reporting obligations have been eliminated.

Capital Gains Tax

Capital gains are included in the savings base. There are some capital gains exemptions e.g. the sale of the primary residence of the taxpayer is granted full or partial rollover relief, as are the capital gains for the sale of qualifying collective investments. Capital gains from investment funds are subject to a flat withholding tax of 19%, unless rollover relief applies.
Collective investments from jurisdictions included in the list of tax havens issued by the Spanish tax authorities are deemed to have a minimum net capital gain of 15% of the acquisition value unless otherwise proven.

Inheritance and Gift Tax

Inheritance and Gift Tax (IGT) is payable by the recipient of the assets at rates of between 7.65% and 34%. Residents are taxed on their worldwide assets and non-residents are only taxed on the assets and/or rights located in Spain.
The amount of tax paid depends upon the value of assets received. Tax rates are subject to a further multiplication factor (ranging from 0.5 to 1.4) based on the relationship of the recipient to the donor or deceased, and the existing wealth of the recipient. Different tax rates may apply in each Autonomous Community.

Various reductions to the tax base on inheritance apply and are dependent on the relationship between the recipient and the deceased and the age of the recipient. For example, where a recipient is a dependent child over the age of 13 but under 21 the taxable base is reduced by €15,956.87 and a further €3,990.72 for each year under 21 up to a maximum reduction of
€47,858.

No reduction is available for more distant relatives or unrelated parties. Additional reductions in each Autonomous Community may apply. 

The Law also provides reductions to the taxable base for life insurance depending on where the policyholder dies, the inheritance of the habitual dwelling of the deceased and the inheritance and gift of assets and shares of a family business.
Although IGT is controlled by each Autonomous Community, there has been a general trend towards full or almost full exemption in recent years for Spanish resident taxpayers making transfers to descendents and spouses. These improvements may be extended to non-residents under pressure from the EU.

Regional and Municipal Taxes

Inheritance and gift tax, capital and property transfer tax, as well as a proportion of income tax, are raised by the Autonomous Community/Region in which the taxpayer is resident.

Property Taxes

An annual real estate tax is payable to the local municipality. The tax is based upon a percentage of the cadastral value of the property. The value is adjusted every 8 years. The rate varies from 0.4% and 1.1% on urban properties and 0.3% and 0.9% on rural properties. Municipalities may, within certain limits, increase or decrease these rates.  If there is a change in land title, a municipal tax (‘land appreciation tax’ or ‘Plus Valia’) is raised based upon the increase in value of the land since it was last sold. The rate is set by the Municipality and varies depending upon the cadastral value and the length of time since the preceding transfer.

Stamp Duty/Transfer Tax

The general rate of Stamp Duty/Transfer Tax is 0.5% rising to 1% in some autonomous regions and can reach up to 6% for property transactions. It is paid by the purchaser or the beneficiary of the transaction. No Stamp Duty applies if the transaction is subject to VAT.

Sales Tax

Sales tax (IVA) of 18% is generally added to the sale price of goods. Some items are exempt from sales tax or are taxable at a reduced rate. ‘New build’ properties capable of being used as dwelling are subject to a sales tax of 8%, which is charged in place of a transfer tax.

Social Security Contributions

An employee is liable to pay social security contributions as a percentage of earnings. The rate is generally 4.7%, but contributions are capped at €3,198 for the year 2010. Compulsory social security contributions made are deductible from taxable income.

Taxation of expatriates living in Spain

Expatriates living in Spain will be classified as either resident or non-resident. An individual is considered resident if:

•  They spend more than 183 days in Spanish territory in a calendar year or,
•  Their principal place of business, professional or economic interest is based in Spain or,
•  Their spouse and/or dependent children are habitually resident in a Spanish territory (unless the individual is separatedfrom their family, or can prove tax residence elsewhere)

In Spain there is no concept of a part tax-year. An individual will be considered to be resident or non-resident for the whole tax year according to the above rules and taxed accordingly.

Income tax is raised in two parts: the majority is raised by the central government, with a smaller percentage being raised at a
regional level by the ‘Autonomous Community’ in which the individual is living. The ‘Autonomous Communities’ also control
inheritance/gift tax rates. If the ‘Autonomous Community’ does not establish its own tax scales then a default tax scale is applied.

Income generated from employment for services rendered in a foreign country is tax exempt up to a limit of €60,100 (2010),
provided that the work is performed for a company or entity non-resident in Spain, or for a permanent establishment located in a foreign country and provided that a tax similar to the Spanish Personal Income Tax is applied in the territory where the work is performed. In addition, the territory must not be considered a ‘tax haven’ by the Spanish tax authorities. At present, the UK Dependent Territories of the Channel Islands and the Isle of Man, as well as Bahrain, Hong Kong and Singapore, are all included on a ‘blacklist’ of tax havens maintained by the Spanish Tax Authorities.

International assignees moving to Spain, may, if certain conditions are met, choose to be taxed under the special taxation regime for expatriates described below.

Taxation of 'Non-Residents' living in Spain

From 1st January 2004 individuals who acquire tax residence in Spain as a result of their transfer to Spain may opt to pay Non-Resident Income Tax in the tax period in which the change of residence takes place and for the following five tax years when the following conditions are met:

• The taxpayer cannot be considered tax resident in Spain in the 10 years prior to their assignment to Spain.

• Their transfer to Spain results from an employment contract. The individual needs to have a local contract with a Spanish
company. In case of a group of companies, an employee can maintain a home country employment contract and be
seconded to work for a Spanish entity.

• The work is effectively carried out in Spain. The work must be performed physically in Spain. This requirement will not be
met if the employee works out of Spain and the income related to the duties performed out of Spain exceeds 15% of their
annual employment income. In case of employees who work for other foreign entities of the group, the above percentage
will be 30%.

• The work is for a company or entity resident in Spain, or for a permanent establishment located in Spain of an entity not
resident in a Spanish territory.

• The earned income derived from the employment contract is not exempt from Non-Resident Income Tax.

Expatriates living in Spain who choose to be taxed under the Non-Resident Income Tax regime are taxed only on income and gains obtained or generated in a Spanish territory, compared to worldwide income and gains for residents. Non-residents may only file individual tax returns, unlike residents who may file joint returns in respect of a married couple.

The tax rates applicable to non-residents were amended with effect from 1st January 2007 in line with those applicable to residents.  A non-resident does not normally benefit from tax free allowances/deductions but expenses can be deducted which relate directly to the generation of the taxable income for residents of other EU member states. However, certain exemptions may apply to nonresidents, in particular residents of other EU countries are not normally subject to Spanish tax on Spanish sourced interest income, or capital gains realised on the sale of certain personal property.

Property rental income, after the deduction of certain expenses, forms part of taxable income. Property which is not used for
rental or economic activity and is not the taxpayer’s permanent residence will be taxed on a deemed income basis at 2% based on cadastral value (equivalent to a rateable value in the UK).

With regard to capital gains arising from the transfer of real property from non-residents, the purchaser is required to withhold 3% of the agreed consideration. This amount is paid to the Spanish fiscal authorities on account against the seller’s potential liability to capital gains tax. In addition, dividends and interest are paid to non-residents net of withholding tax.

Dividends paid to nonresidents are exempt up to €1,500 pa, but withholding tax applies and a refund must be requested. The amount of the tax withheld will depend on the terms of any double taxation treaty with the payee’s country of residence. Spain has negotiated over 50 double taxation treaties.

Inheritance tax applies to non-residents only in receipt of assets and/or rights located in Spain, but many IGT exemptions are not applicable to non-residents. This position may alter following the issue of a ‘reasoned opinion’ by the European Commission requesting that Spain makes available the same exemptions to both Spanish residents and non-residents.

Gerard Associates Ltd. Financial Advisory Services does not provide individual tax advice, and nothing contained in this briefing should be construed as such. We make every effort to ensure the accuracy of the information but cannot be held responsible for any liability arising.

It is essential that all clients seek tax advice specific to their own personal circumstances with the relevant tax professional of the jurisdiction(s) in which you are liable to tax.

This has been prepared based on our understanding of current legislation and tax practice as at the date above. However, these are subject to change, and may result in income tax consequences different from those detailed below.

We cannot accept responsibility for its interpretation or any future changes to law.