Benjamin Franklin once stated that “in this world nothing can be said to be certain, except death and taxes”.And although we can do little to help you with the former, we are experts on handling the latter, especially in Spain.
In this article, we are going to give an insight on how the tax system works in Spain and what different taxes you need to know about when investing in our country. Although it is impossible to summarize in the post all the need-to-know information about every kind of tax in Spain, we hope this will help provide a general idea that for anyone considering moving to Spain to live, work, run a business, buy a property or even just invest here without becoming a resident.
First of all, we have to make clear that the Spanish tax system is very complex. Aside from having the reasonable complexity of a developed post-industrial society (direct vs indirect taxes, personal vs corporate taxes, one-time payment vs yearly), here we have three levels of government, and both the local and the regional levels have a broad range of jurisdiction that allow them to change many taxes, decide on what to tax, at what rates, with what exemptions, etc. So, for every economic activity or situation, we must bear in mind that where we or our business is located is extremely important.
In addition to that, foreigners need to know that they are treated differently depending on their country of origin and on their residency situation.
- PERSONAL INCOME TAX (IRPF)
This is the number one tax in Spain by far.
A part of it is set by the national government and goes to the national budget, but the other is established by each autonomous community (the regions in Spain), what leads to entirely different tax rates all across the country. Regions end up competing against each other to offer better tax regimes for potential migrants (including internal migrants). Despite the chaos this seems to be, this is honestly beneficial for you.
It follows a dual structure creating two branches of this tax:
- Renta General, from 19 to 48% of your income from:
- Labour income: wages and product of work.
- Capital income: both fixed capital assets and most of movable capital (returns on shares, rental of rights, intellectual property, etc.)
- Economic activities: for anything that will not fit into any other category. For instance, self-employed people whose income cannot be considered a salary.
- Renta del Ahorro, from 19 to 26%:
- Certain movable assets.
- Transfer of patrimonial assets: profitable sell of any property, real estate, stocks, assets, etc. For non-residents, 19% if the owner is national of the EU, Iceland or Norway and 24% if not. Always calculated upon the net benefit, not the whole amount.
In both branches, the rates are progressive, which means that the bigger the amount, the higher the tax rate.
- WEALTH TAX (IP):
This one usually raises a lot of conflicts, because it imposes new levies on assets you already paid for. But it is created with high general levels of exemptions, we must say; the general rule is that your first 700.000 euros are tax-free (for this particular tax, sorry) and you only start paying between 0,2 and 2,5% of the amount that goes over that exempted amount. The scale is progressive too, and you will have to do this every year.
However, again this varies a lot depending on each community, so the minimum exempted amount could be from around 500.000 euros to 1 million and the rates from 0,2 to 3% approx.
As for what is being taxed here, we are talking about pretty much everything altogether: the ownership of assets, real estate, savings, jewels, boats, etc.
On the positive side, residents in Spain are taxed counting on their wealth worldwide, but non-residents only for what they have in Spain.
- INHERITANCE AND GIFT TAX: varies a lot depending on the AC.
This taxes the receipt of money, assets or property as a result of a donation or inheritance. Again, here every region has a different regime, but fortunately there is a general rule at the national level that applies when the individual is not resident of a certain autonomous community or has a property in Spain without being a resident in the country.
It works from both a subjective and an objective approach: if either the heir is resident in Spain or the assets to be inherited are from Spain, the tax will apply.
Overall, the tax rates go from 7 to 34% approx., following a progressive structure. But every region will set their own bonifications and conditions, and besides all this what you pay will depend largely also on your age, your relationship with the person the money comes from and other factors.
- VALUE-ADDED TAX (VAT OR IVA):
The VAT falls upon consumption and transactions. This is applied in most countries in the world, and though it obviously varies in every nation the general idea is shared universally: a certain percentage is paid in every step of the production process of (almost) every good and service. That is why we call it “value-added tax”.
In Spain it goes from 4 to 21%, depending on the services and goods. But there are some that are fully exempt. Both as a consumer and as an economic actor you will have to deal with this on a daily basis.
Since not every sale implies a “value-adding” step, sometimes you will see that you are not subject to VAT for your purchase and instead you will be paying the transfer tax, as we explain further below.
- CORPORATE TAX:
When running a business in Spain, it is essential to know the different taxes that apply to your operations. You will need to pay and charge your clients with the respective VAT, and the transfer tax (explained further below) for every acquisition, fusions, etc.
But the most important by far when speaking about taxation of businesses is the corporate tax. Fortunately, this is pretty straightforward: there is a fixed tax rate of 25% that falls upon the net income (the benefit). Nevertheless, there are a few very specific categories that enjoy better tax rates (of 20, 10, 4, 1 or even 0%).
That is why generally for small businesses it is more convenient to pay as individuals by IRPF (see above), but once the income level increases, it becomes more attractive to pay taxes as a company and avoid a much higher IRPF.
Stay tuned for Part 2 of our taxes blog, where we discuss real estate taxation.