Spain

Spain is one of the most popular European destinations for expats. Not only does it rank well amongst expats from other European countries, but it has also recently been receiving a higher number of expats from outside of Europe. The reasons for this are due to its favourable climate, particularly along the Mediterranean coast, and due to its modest standard of living and laidback lifestyle.

Whilst the Spanish way of life is fairly laidback, Spain’s tax system certainly isn’t. With income tax, capital gains tax, wealth tax and succession/inheritance tax amongst others, seeking financial advice for your tax and wealth planning has become far more of a priority.

Our team of advisers will be able to provide you with a tailer-made personalised financial plan targeted at achieving your long-term financial goals. We will help you achieve your dream of becoming financially independent and give you the ability to make the most out your time in Spain.

Residency | tax rates

You are considered tax resident if you are resident in Spain for more than 183 days during the year (January to December) or if your major source of income or economic activity occur in Spain. If you are considered Spanish tax resident, you are subject to tax on your worldwide income and gains.

Spanish residents must submit a spanish tax return and pay spanish income tax on their worldwide income in the following cases:

Their annual income from employment is more than €22,000
They are self-employed in Spain or run their own business
They receive rental income of more than €1,000 a year
They have capital gains and savings income of more than €1,600 a year
It is their first year declaring tax residency in Spain.

Income tax

In Spain, income tax is split into two categories; income which is savings related versus income which is non-savings related (also known as general income).

Your personal income, which is not categorised as savings-related, is subject to Spain’s general income tax rates. This includes:

All earned income (i.e. salary, self-employment and pension income)
Income from rental properties
Notional rental income (imputación de rentas inmobiliarias)
Royalties
Any imputed income and gains not made on the sale/transfer of assets (for example, from lottery/gambling)

In Spain, tax rates are not uniform across the country. The amount of income tax you pay is based on your earnings, and which of the 17 autonomous regions you live in. Your total tax liability will be a calculation of the state’s general income tax rates plus the relevant regional tax rates.

Spain’s general income tax rates in 2021 are the following:

EUR 0 – EUR 12,450 19%

EUR 12,451 – EUR 20,200 24%

EUR 20,201 – EUR 35,200 30%

EUR 35,201 – EUR 60,000 37%

EUR 60,000 – EUR 300,000 45%

Over EUR 300,000 47%

Income which is considered as savings related is taxed differently. This includes income from:

Interest on savings
Shareholder dividends
Income from annuities
Income derived from life assurance contracts
Capital gains on the sale/transfer of assets.

Residents are taxed on their worldwide savings income and non-residents on their Spanish savings income at a fixed rate. The rates for 2021 are as follows:

The Beckham Law

You may be forgiven for believing that footballer David Beckham only made an impact on the football pitch, however, he also left his mark on the Spanish tax system. When David Beckham joined Real Madrid in 2003, the Beckham Law was allegedly set up so that he did not have to pay tax on his worldwide image rights.

As a result, the Spanish authorities introduced a special tax regime for foreigners working in Spain on an employment contract with a Spanish company. This allows foreign workers to pay a flat fee of 24% instead of the progressive tax rates on their worldwide incomes. The flat rate of 24% can be applied for income up to the amount of €600,000. The excess will be liable to tax at 47% (this was increased from the 2021 tax year from 45%).

Personal Allowances & Deductions

You can also claim tax deductions in Spain for:

Payments into the Spanish social security system
Spanish pension contributions
Buying and renovating your Spanish home
Joint filings
Charitable donations.

Modelo 720

In 2013 the Spanish Tax Office implemented a new tax obligation designed to avoid tax fraud and tax evasion. From this date, as at 31 December each year, all individuals that are tax resident in Spain must declare all their assets abroad worth more than €50,000 using the Modelo 720 Form. The report needs to be completed between January and March for the previous tax year.

Failure to disclose such assets may result in heavy fines (a minimum of €10,000 and a further €5,000 on top per asset) and in some cases a prison sentence. In fact, the fines imposed by the Spanish Hacienda for non-disclosure are some of the heaviest in the European Union, to the point at which the European Commission brought Spain before the European Court of Justice as it felt that the sanctions imposed for the failure to file Modelo 720 are contrary to fundamental principles of the European Union.

Nevertheless, filing of Modelo 720 is still a fundamental part of an individual’s tax obligations in Spain, and therefore, if you fall within its scope, we strongly advise you to comply and seek the necessary advice from a qualified tax accountant in Spain.

What assets fall within the scope of Modelo 720?

Immovable property (real estate)
Bank Accounts
Investments

If the value in each asset class exceeds the €50,000 threshold as at December 31st (or on average over the three proceeding months for bank accounts) then a declaration must be made. For example, if you have five bank accounts overseas and the total value between them all is €50,000 or more, each account must be reported. The same applies to real estate and investments. Assets in joint names are also subject to the same €50,000 threshold.

Life Assurance Policies

Spanish tax-compliant life assurance policies do not need to be disclosed as an overseas asset under the Modelo 720 declaration.

Spanish Wealth Tax

Without appropriate planning, wealth tax in Spain can be a major concern for high net worth individuals. Aside from income tax on general and savings income, if your worldwide net worth is valued at over EUR1m, you may also be liable to wealth tax.

Wealth tax in Spain is payable on the value of your worldwide assets on 31 December each year. On assets up to €167,129, the state progressive wealth tax rates start at 0.2% and rise up to 2.5% on assets over €10,695,996. From the 2021 tax year, the government increased the highest tax band rate by 1% in autonomous communities that haven’t approved their own rates. This means that assets valued at more than €10 million can be taxed up to 3.5%, depending on the region. Having said that, it is very important to establish what the rates are in your Autonomous Region as they can adjust these rates as shown below:

Wealth tax allowances

Before being liable to wealth tax, you can deduct your personal allowance against the value of your worldwide assets. The allowances are:

As described above, these figures may vary depending on the Autonomous Region you live in. For example, in Madrid there is a 100% allowance, meaning that you don’t need to pay wealth tax.

Succession Tax (SST)

Spanish Inheritance tax, more commonly known as Spanish Succession Tax (impuesto de sucesiones y donaciones or ISD), is potentially the most punitive system in Europe, certainly more so than the UK. For instance, whilst spouses are normally exempt from inheritance/succession tax in many European countries, this is not the case for Spain. Beneficiaries, including spouses, are subject to allowances, however, what further complicates this is the fact that allowances are set by the State and also by the relevant Autonomous region that you live in. Catalonia, Aragon, Galicia, the Balearic Islands, the Basque Country, and Navarre have their own succession rules.

In Spain, all beneficiaries are liable to SST in some form or another. SST is payable by the beneficiary (whether Spanish resident or not) on any assets located in Spain (such as property). If the beneficiary is a Spanish resident, they will be liable to SST on any worldwide assets being received. The only instance where SST does not apply is when a non-Spanish asset is being passed to a non-Spanish resident beneficiary.

Spanish Succession Tax Allowances and Rates

The State allowance depends on your relationship to each of your beneficiaries. These are categorised in four groups:

Additional allowances may be applied by the Autonomous region you live in. In certain cases, children and spouses may be entitled to an allowance of €100,000.

The State SST rates range from a minimum of 7.65% to a maximum of 34% depending on the amount being inherited by the beneficiary. The rates will also vary depending on the Autonomous region.

The good news is that there are ways to reduce the SST liability for your beneficiaries. However, as succession law in Spain is inherently complicated, and since your liability to SST will depends on various factors, it is important to seek personised advice to obtain the appropriate succession planning advice based on your personal circumstances.

Life Assurance Policies

If you live in Spain and you are looking to invest some of your capital, your first consideration should be to place your money in an approved, Spanish tax-compliant life assurance policy. There are numerous life companies that offer life assurance policies for Spanish residents, however not all will qualify as Spanish tax-compliant.

This is important because, when placing your capital in an approved Spanish tax-compliant life assurance policy, any income and gains that arise within the policy are not taxed unless a withdrawal is made. This means that you can sell assets within the policy at a gain and not pay any tax. Once a withdrawal is made, tax is only payable on the gain element of the withdrawal, not the full amount. A non-tax compliant policy does not provide the same tax deferral benefit. Instead, the annual gain must be declared on an annual basis and tax must be paid accordingly, even if there have been no withdrawals. It is therefore important to seek advice to make sure you are investing your money in a tax efficient structure.

Withdrawals from life assurance policies

The life company is obliged to calculate the amount of tax payable on any realised gains (of up to EUR 6,000) arising from any withdrawals, full surrender or maturity and remit the tax to the Spanish tax authorities via a Tax Representative in Spain. The current withholding rate for investment income and capital gains is 19% for Spanish tax residents. If the amount of taxable growth withdrawn exceeds EUR 6,000, additional tax may be due.

Despite tax being deducted at source by the life company, you are still obliged to include the withdrawal, full surrender or maturity in your Personal Income Tax Return.

Disclaimer:

The content of this guide is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing in this guide constitutes a solicitation, recommendation, endorsement, or offer by MWC Group or any third party service provider to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the laws of such jurisdiction. Please contact your own lawyer, accountant, or tax professional with any specific questions you have related to the information provided that are of legal, accounting or tax nature. The content of this guide is of a general nature and does not address the circumstances of any particular individual or entity. All information of this guide is provided in good faith, however we make no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability, or completeness of any information. By reading this guide, you agree not to hold MWC Group, its affiliates or any third party service provider liable for any possible claim for damages arising from any decision you make based on information or other content made available to you by this guide.