ABC of the personal resident & non-resident income tax in Spain – What are the applicable taxes and how much do I have to pay?

If I am not a tax resident in Spain…

If you do not have tax residency in Spain (most importantly you live less than 183 days per year in Spain), you pay a tax in Spain only on your income and capital gains obtained from Spain. The concept of the declaration is Non-Resident Income Tax (“IRNR”). To find more detailed information of how the tax residency is defined apart from the main rule of 183 days, please check out our article: BD1: “Spanish tax residency – rules and recommendations” [link to the article BD1].

The tax rates applicable in the IRNR vary between 19% and 25% depending on your country of residence and the type of income.

Your Spanish tax declaration as non-resident includes the following income when it is obtained in Spain:

  • Economic activities (salaries, invoices as self-employed)
  • Income from movable capital (dividends, interest, royalties, etc.)
  • Income from real estate capital (rental income)
  • Mere possession of a second residence
  • Pensions

Other common taxes that may affect non-residents are the following: (Please note that there are variations according to the autonomous community where the assets are, or the income is received from):

  • Wealth tax for assets located in Spain if the total value exceeds 700.000 euros
  • VAT / Tax on Capital Transfers
  • Real Estate Tax
  • Tax on the Increase in Value of Urban Land

 

If I am a tax resident in Spain …

The main tax to be paid as a resident private individual will be the Personal Income Tax (IRPF). The taxable income consists of the following:

  • Earnings from work (salary, pensions, etc.)
  • Capital returns (dividends, interest, etc.)
  • Income from economic activities (invoices as self-employed)
  • Capital gains and losses (derived or not from equity transfers)
  • The imputations of income that are established by Law (for example, those related to a second home)

Everyone with a residence in Spain is required to file a personal income tax return, with the exception of those taxpayers who have exclusively received income below the limits established in each case.

The income tax of Spanish tax residents is progressive. In 2020 the personal income tax rates for high income x euros or more annually, go up to x%.

The capital gain tax varies between 19% and 23%.

In reality the tax to be paid is less than that, because the tax base is not the gross salary, but the result of subtracting from the salary the personal and family minimums, a deduction related to the habitual residence, etc. Part of the resident personal income tax will be advanced to the Treasury through payroll. During the months of April to June, we compare the actual tax to what we have already paid to the Tax Agency as withholdings and pay the rest or receive the refund.

Other common taxes that may affect residents: (Please note that there are variations according to the autonomous community where the assets are, or your residency is in):

  • Wealth tax for global assets (if the value of the assets in total exceeds 800.000 euros)
  • VAT / Tax on Capital Transfers
  • Real Estate Tax
  • Tax on the Increase in Value of Urban Land

Double taxation and the International treaties to avoid it?

Sometimes under the laws of two different countries, the same income has to be declared and paid in both countries. To avoid these situations or at least to mitigate double taxation, the countries have signed a whole series of Conventions in this regard. Through these agreements, it is determined which of the countries has the capacity to tax one income or another, and what are the maximum taxes and mechanisms to mitigate double taxation. Here is a link to Spanish tax authority’s website that lists the double taxation treaties Spain has currently in force:

https://www.agenciatributaria.es/AEAT.internet/en_gb/Inicio/La_Agencia_Tributaria/Normativa/Fiscalidad_Internacional/Convenios_de_doble_imposicion_firmados_por_Espana/Convenios_de_doble_imposicion_firmados_por_Espana.shtml

 

How to reduce the tax bill?

There are effectively options that allow lowering the tax bill all within the current legislation and without assuming any risks. Here are some examples:

  • The so called “Beckham clause”, by virtue of which a non-resident who becomes a tax resident in Spain can choose to pay non-resident income tax (fixed rate of 24%), instead of resident income tax (progressive rate up to 45%, approximately), for the first 600,000 euros during the year in which you become a tax resident and 5 more years. There are numerous requirements to be met to pay taxes in Spain as a non-resident, but basically these are employees who are displaced to Spain under a new employment contract or an existing one. This option is also applicable for administrators of companies incorporated in Spain, as long as said administrator does not have directly or indirectly more than 25% of the company. To understand the “Beckham clause” more in detail, please read our article: “Beckham law: special taxation for expats – the way to reduce your personal income tax in Spain by up to 50%” [link to the article BD4]
  • Buying homes with the intention of reselling them after remodeling them may justify a reduction in the Property Transfer Tax (ITPO). In Catalonia, the reduction would mean that instead of paying 10% for ITPO, one would pay 3%.
  • Proper planning for the purposes of Wealth Tax and Inheritance Tax can reduce the invoice or even remove the obligation to pay. For example, buying and selling a property in a financed manner and / or in a fractional manner with your wife / wife / children may be a recommended option.
  • Likewise, if you carry out an economic activity, there are significant reductions for the purposes of the Wealth Tax and the Inheritance Tax when in certain type of transfers of ownership of the business.
  • The transfer of shares of a company mainly composed of real estate or the transfer of a branch of activity are operations that can lead to significant tax savings with detailed planning.
  • The internationalization of companies, when applying the treaties to avoid double taxation and other international regulations offer some interesting tax planning opportunities.

 

For further information, the AvaLanding tax advisors are there for you.

Shall we talk?