Tax in Spain

The tax regime has changed dramatically in Spain in the past decade. It is far harder now to avoid paying tax and the penalties are high. Income tax in particular has risen considerably, although it remains lower than the EU average.

But it is still very difficult to get consistent advice on what you should and shouldn’t be paying. The rules keep changing, the system is complicated and you may receive different advice from different tax advisers.

Foreign residents would be wise to find yourself an English-speaking adviser to explain the intricacies of your tax situation as it will depend upon numerous complicating factors such as where you live in Spain, whether you are resident or non-resident, the source of your income and your assets.

The Spanish tax year runs from 1 January to 31 December and taxes are levied by governments at three levels: centrally, regional and locally. There are assessment and tax collection centres in all provincial capital towns whose information section (oficina de información al contribuyente) will offer free advice and help you fill in your tax declaration, though they won’t do it for you.

Who Pays

There is a difference between being a Spanish resident for civil purposes (ie. by having a residence card) and being a resident for tax purposes. If you live in Spain for more than 182 days per year, you are automatically considered a Spanish resident for tax purposes.

This means you will be liable to pay income tax (Impuestos sobre la renta de las personal físicas, IRPF) on your worldwide income when you complete a declaration (Declaración de la Renta) during May or June the following year.

The current government is in the process of drawing up a new law on income tax, which will affect tax declarations from 2007. At the moment, Personal Income Tax starts at 15 percent and rises to 45 percent. It is a direct tax levied on the income of individuals, minus the expenses deductible according to Spanish law. At present if you earn less than EUR 22,000 you do not have to fill in an income tax return.

Non-residents Income Tax (IRNR) is calculated according to any income derived in Spain, including a money deposit with a Spanish bank, a property in Spain or income made from any business in Spain. The United States, however, is the only country that taxes its non-resident citizens on income earned abroad.

Residents are taxed on their worldwide income. But you may deduct income tax paid in your home country to avoid double taxation.

Various types of taxes

INCOME TAX (IRPF)
— employees’ income tax is deducted at source by employers; self-employed workers pay the tax quarterly (pago fraccionado).

Non-residents who earn money from a Spanish source, and non-residents who own property should file an income tax declaration.

This tax arises when individuals have any the following:
•    Income from employment
•    Income from economic activities (business profits)
•    Income from current assets (interest, dividends, etc)
•    Income from property (rentals)
•    Capital gains
•    Deemed income (on the benefits derived from certain assets)

Residents are taxed at a maximum of 18 percent on certain types of income such as savings income and capital gains. On the remaining sources of income the minimum tax rate is 24 percent and the maximum is 43 percent. Some increases to these rates are currently planned by the government to such as raising the rate applicable to savings to 20 percent.

Resident taxpayers are entitled to a minimum personal allowance of EUR 5,150. This amount increases after the taxpayer reaches the age of 65. Further allowances can be claimed for dependants.

Other deductions may also be available. It is worth noting that a deduction may be made for the amounts paid for the purchase of your main residence, amounting to 15 percent of the amount invested up to a limit of EUR 9,015 per year. This also applies to the amounts paid in relation to the mortgage obtained when acquiring the house.

Residents and non-residents with income in Spain (other than that made from property letting) must make their annual income tax declaration between 1 May  and 20 June. Payments on account may be required for sole traders and the total income tax for each calendar year is due by 30 June of the following year. 40 percent of the remaining payment due may be postponed until the following November.

PROPERTY/REAL ESTATE TAX OR RATES (Impuesto sobre bienes inmuebles urbano, IBI)
— paid by all property owners, resident or non-resident, to go towards street cleaning, education, council administration, local sports amenities etc.

There is council tax due on the ownership of urban property which is calculated on the rateable value of the property (valor catastral). Rates range between 0,4 percent and 1,3 percent. IBI is calculated according to the fiscal or rateable value of your property. Ask at your town hall when to pay as they may not send out a bill.

Local tax also arises when the property is sold, this charge considers the rateable value increase during the period of ownership.

STAMP DUTY
— Taxable transfers of buildings and land are taxed at the rate of 7 percent, and other items are taxable at a lower rate. First transfers of property from the developer are subject to VAT instead of stamp duty at 7 percent for buildings and 16 percent for land.

Stamp duty also arises at the rate of 1 percent on share capital, either at the incorporation stage or when share capital increases are made.

WASTE COLLECTION/MAINS DRAINAGE TAX (Basura y alcantarillado)
— annual tax payable by all property owners.

CAPITAL GAINS TAX (Impuesto sobre incremento de patrimonio de la venta de una bien inmueble)
— residents must declare any profits from the sale of property and other assets such as a business, antique or stocks and shares in Spain in the annual tax return and pay between  19 and 21 percent  depending on the amount of other gains in the year.

INHERITANCE AND GIFT TAX (Impuesto sobre sucesiones y donaciones)
— payable by beneficiaries within six months of a death if the person died in Spain.

BUSINESS TAX (Impuesto sobre actividades económicas/IAE)
— paid by all businesses with annual turnover exceeding EUR 1 million. However, at the present moment, small and medium sized companies are exempted from this tax.

COMPANY/CORPORATION TAX (Impuesto sobre sociedades)
— are taxes on taxable profits generated by companies. The standard rate in 2009 is 30 percent. However, the taxable profits of companies with a turnover below EUR 5 million are taxed at 20 percent for the first EUR 120,202 and at 25 percent for the remainder of the profits. This tax will also be affected by the temporary Government reform planned which will include considerable reductions for businesses meeting targets such as increasing or maintaining their number of employees.

Payments on account may be required and the total of the corporation tax charge is due within the six months and 25 days after the end of the financial year.

OFFSHORE COMPANY TAX (Impuesto especial)
— annual tax on offshore companies that do not declare the individual owner of property in Spain or the source of investment.

MOTOR VEHICLE TAX (Impuesto de circulacion)
— paid by anyone who owns a Spanish-registered vehicle. The amount is based on the age and the power of the vehicle and the region you live in. The larger the city is, the higher the tax. For an average car, it costs about EUR 60 a year.

VALUE ADDED TAX (IVA)
— is 16 percent at the moment. This is the rate charged on most supplies although there a reduced rate for certain products and services of 7 percent and 4 percent. However, the government has just announced an increase in this tax in 2010 in light of the current economic climate to 18 percent for general rate and 8 percent and 4 percent for the reduced rates.

Registration is compulsory for companies or individuals making supplies which fall within the scope of this tax. It is important to point out that, unlike in some countries, businesses making supplies of goods or services subject to VAT must register from commencement of trade, as there is no lower threshold limit.

This article has been updated by Expatica tax expert Susana Serrano-Davey, the founder and director of Rose & Clavel which is an Anglo-Spanish chartered accountants based in Nueva Andalucia, Marbella. Her firm offers high-quality, professional and reliable accountancy services and innovative business solutions in English and Spanish.