Living in Spain: Taxation

Income Tax

Income tax varies depending on whether the taxpayer resides in Spain. If you are resident in Spain, you will have to pay tax on your total worldwide income (IRPF, personal income tax), in other words any income from employment, capital gains or business earnings, and any asset gains and losses. However, some types of income are exempt, e.g. benefits recognised by the Social Security as a consequence of disability or severe invalidity, public grants or lottery and betting winnings.

Spain has entered into agreements with all other Member States, except Cyprus and Malta, which are designed to help you avoid paying tax twice on the same income in different countries. So if you earn money in another Member State, you will pay tax on that income either in Spain or in the other country, or pay a portion in both countries, depending on the terms of the double taxation agreement between Spain and that country. Even if there is no tax agreement, however, Spain’s domestic legislation entitles you to a credit against your Spanish tax liability for the lower of the following quantities: the actual amount paid abroad in tax of a similar nature or the result of applying the average effective tax rate to the portion taxed abroad.

You are taxable on income you receive during a tax year (generally the same as the calendar year). With the exception of capital gains obtained in a period of over one year and taxed at 15%, tax is charged at progressive rates, the rate increasing in line with the level of your taxable income. In calculating how much tax you have to pay, you are entitled to reductions before applying the taxation rate that basically depends on your personal and family circumstances, and to various deductions, mainly for investments in your usual place of residence. These decrease the amount of tax payable.

Tax is withheld at source on certain types of income, namely income from employment, self-employment and investments other than real estate. If you are an employee, your employer will withhold tax from your wages at a sliding rate, depending on your personal and family circumstances and on your total earnings. If you provide professional services, tax will also be withheld on your income at a flat rate. If you are an entrepreneur or self-employed professional, you have to make quarterly advance payments on your estimated tax liability for the year. Everyone, provided that their income exceeds a certain minimum amount, must calculate their own tax liability and file a tax return after the end of each year with the tax authorities. The annual return can be filed at the offices of the tax authorities, with financial institutions or electronically, and must be completed in the months of May and June of the year following the year in question. Any outstanding tax must either be paid at that time or in two instalments: 60% at the time of filing the return, and the balance by a pre-determined date, no later than the start of the month of November of the same year.

If you live abroad but gain some income on Spanish territory, you must pay tax on the latter (tax on the income of non-residents). As is the case for IRPF, certain types of income are exempt from taxation. In general, the tax payable is obtained by applying a rate of 25% to the taxable amount. In the case of transfers of real estate situated in Spain, the buyer must withhold and pay 5% of the total as an advance payment.

If you are resident in an EU Member State and have gained income from employment and business activities in Spain representing at least 75% of your income, you may choose to pay IRPF, provided that this income was indeed subject to tax on the income of non-residents during the period in question.

Wealth Tax

If you are resident in Spain for tax purposes, you are subject to tax on your net wealth, i.e. on your worldwide assets and financial rights, minus any charges and debts, if your net wealth exceeds a minimum amount. Some assets and rights are exempt, such as your usual residence up to a maximum of €150,253.03. Wealth tax is charged at progressive rates, and you have to calculate your own tax liability, complete a tax return and pay the tax during the period within which the IRPF return must be filed.

If you are not a resident, you must file the tax return for any of your assets and rights that are situated, may be exercised or must be fulfilled in Spain, irrespective of the value of your net wealth.

Tax on Inheritance and Gifts 

Tax is payable on the acquisition of assets and rights through inheritance, legacy or any other type of succession, lifetime gifts and the receipt of money by the beneficiaries of life assurance policies where the policyholder is not the beneficiary.

In the case of “mortis causa” acquisitions, the taxable person is the successor in title; in the case of donations, it is the donator, and in the case of life assurance policies, it is the beneficiary.

Criteria for Determining  Residency in Spain

A taxpayer is considered ordinarily resident in Spain if any of the following situations applies:

• he or she spends more than 183 days on Spanish territory during the calendar year;
• the main centre or base of his or her activities or economic interests is in Spain, directly or indirectly.

It is assumed, unless there is proof to the contrary, that a taxpayer is ordinarily resident in Spain if his or her spouse is ordinarily resident there, unless they are legally separated, and any dependent minor children.

In certain circumstances, natural persons who have moved to Spanish territory and whose residence for tax purposes is therefore in Spain may choose to pay the IRPF (personal income tax) or the IRNR (tax on the income of non-residents) over the period in which the change of residence takes place and during the following five tax periods.

Value Added Tax

VAT, which has been harmonised in the European Union, is a consumption tax on goods and services supplied by entrepreneurs or professionals, and intracommunity purchases of goods and imports. It is applied throughout Spanish territory, with the exception of the Canary Islands.

This taxation of added value at each stage in the production chain takes place via the cascade mechanism, i.e. entrepreneurs or professionals pass on the tax through the prices of their goods and services and deduct the tax on purchases used in the production process. When the deductions exceed the tax due, taxable persons may request a refund on the balance on 31 December.

Legislation includes various possible exclusions or exemptions. These include the health and welfare services, the education sector, financial and real estate transactions (particularly the second and last instalments on buildings when these are made upon completion of construction).

In general, the place of the taxable transaction in the case of goods is the place of transaction, while for the provision of services, it is the service provider's central office. In both cases, there are various special rules.

The VAT base is generally calculated using the total amount paid in return for the good or service. In the case of imports, it is the result of adding various amounts to the customs value, such as the incidental expenses incurred up to the first place of destination within the Community, provided that these are not included in the customs value.

In general, VAT must be paid by natural or legal persons who are entrepreneurs or professionals providing goods or services subject to taxation (there is a special rule known as the reverse charge mechanism for entrepreneurs or professionals acquiring goods or services subject to tax from persons or entities not established in the territory as defined for VAT purposes, for which exceptions also exist), the purchasers in intracommunity transactions and those who effect importation.

There are three tax rates in Spain: the general rate of 16%, and two reduced rates: 7% (e.g. on accommodation or transport for passengers and their luggage) and 4% (e.g. on food such as bread, fruit and vegetables, books, newspapers, medicines for human use or certain types of social housing).
Various special arrangements exist: the simplified scheme, the arrangements for agriculture, livestock and fisheries, second-hand goods, works of art, antiques and collector’s pieces, investment gold transactions, travel agencies, the equalisation scheme and the scheme for electronically supplied services.

In general, the tax period coincides with the calendar quarter, although it is only the calendar month in the case of large businesses (those with a turnover of more than €6,010,121.04 euro for the previous calendar year). In addition to the returns that must be filed for each of these periods, taxable persons must submit an annual summary statement.

Tax on Capital Transfers and Documented Legal Acts 

This is a tax on taxable inheritance transfers (“inter vivos” taxable transfers of any goods and rights that make up the assets of natural or legal persons, the creation of rights in rem, loans, securities, lettings, pensions and administrative concessions), corporate transactions (the formation of companies, the increase or decrease of their capital, mergers, demergers and the dissolution of companies, contributions made by shareholders to make good company losses and the transfer to Spain of the effective head office or registered office of a company when neither of these are situated in the European Union) and documented legal acts (notarial, commercial and administrative documents).

Local Taxes

The following local taxes must be paid to the municipalities: tax on immovable property (Impuesto sobre Bienes Inmuebles), tax on economic activities (Impuesto sobre Actividades Económicas) and vehicle tax (Impuesto sobre Vehículos de Tracción Mecánica). Taxes on construction, installation and works (Impuesto sobre Construcciones, Instalaciones y Obras) and on the increase in value of urban land (Impuesto sobre el Incremento de Valor de los Terrenos de Naturaleza Urbana) may also be charged.

Murcia has the lowest charges.

Last edited:08/08

Source: European Union
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