The Expat’s Guide to Spanish VAT

Everything you purchase in Spain has a sales tax attached to it.
However, in Spain and many other countries both consumers and business owners alike are subject to pay a value-added tax as well.

 

Understanding what value-added tax is  and how it works is critical to living and running a business in Spain. So, if you’re planning on relocating and starting or taking over a new business in the country, then keep reading—this article applies to you

What Is VAT in Spain?

The Spanish value-added tax—VAT for short, or Impuesto sobre el Valor Añadido (IVA) is an indirect and general consumption tax that is assessed based on the value added to goods or services.

Currently, there are more than 160 countries around the world that use this system of taxation, although it’s most commonly used within the European Union (EU).

The Spanish VAT is applicable to most commercial activities within the country that involve the production and distribution of goods, as well as the purveying of services. There are some specific cases in which individuals are exempt from the VAT tax application, but we’ll talk more about that later.

Essentially, a value-added tax is placed on a product or service at certain stages of the supply chain, from production to the point of sale. Of course, it’s the final consumer that is charged a percentage of the price of the product or service, and every consumer is subject to pay it.

The amount of VAT that the consumer is subject to pay depends on the cost of the product or service and the VAT rate applicable, minus the cost of the materials used in the product. Those materials have already been taxed throughout the supply chain.

How Spain Value Added Tax Works

As mentioned above, VAT is applied at each point in the supply chain. Essentially, it’s applied to the price at each point in the manufacturing, distribution, and sales process of an individual item.

Unlike sales tax, which is only assessed and paid by the consumer at the last point in the supply chain (the physical purchase), VAT tax is assessed and collected at every single stage.

Here’s a less confusing example:

Let’s say there’s an expensive candy that’s being manufactured and sold in Spain. We can call it Dulce del Expat. Now let’s pretend that there’s a 10% value-added tax in Spain and that we’re dealing in dollars.

Here’s how the VAT taxing pipeline would work:

  • Dulce del Expat’s manufacturer purchases the raw materials needed for $2, plus a VAT of $0.20—[payable to the government of Spain—making the total price $2.20
  • The manufacturer then sells Dulce del Expat to a retailer for $5 with a VAT of $0.50. However, the manufacturer only renders $0.30 to Spain, which equates to the total VAT minus the prior VAT that was charged by the raw material vendor. (Note that the $0.30 is also equal to the 10% of the manufacturer’s gross margin of $3)
  • Finally, the retailer sells Dulce del Expat to consumers for $10 plus a VAT of $1, making a total of $11. The retailer renders $0.50 to Spain, making the total VAT at this juncture $1, minus the previous $0.50 VAT charged by the manufacturer. (Note that the $0.50 also makes up for 10% of the retailer’s gross margin on Dulce de Expat)

Essentially, each process charges more to the next supply chain handoff while subtracting the costs of the previous process. Eventually, it all adds up to the total Spanish VAT rate.

How Is VAT Different from Sales Tax?

While VATs and sales taxes have the potential to generate the same amount of revenue, they differ at the point at which the money is paid and by whom.

Keeping the above example of how VAT taxing works, you’ll recall that a 10% rate is paid at each point of sale throughout the supply chain. Each time a sale is made, whether it be from manufacturer to vendor, vendor to retailer, retailer to consumer, each individual is paying a 10% VAT on top of the distribution or purchase cost.

Sales tax, on the other hand, is only paid at the point of purchase from consumer to retailer. Even if the sales tax is also set at a 10% rate, it’s only charged one time. So, if the retailer is selling dulce de Expat for $6, then the consumer will be paying $0.60 in sales tax on top of the VAT, and the retailer will owe a certain percentage of that sales tax to the government.

Another significant difference between the two types of taxes is that VAT tends to be more advantageous. For example, it’s much easier to track compared to national sales taxes as the exact tax levied at each stage of production is recorded.

With sales tax, the entire amount is levied at the point of the sale and rendered to the government thereafter, which creates a challenge when it comes to allocating to the previous production stages.

Lastly, because the Spain VAT only taxes each additional value—not the sale, product, or service itself—there is assurance that there’s no double taxing.

How Much is VAT Tax in Spain?

The current VAT rate in Spain is set at 21% for most goods and services. This rate has risen from 16% since 2012.

However, there is a reduced rate of 10% when it comes to passenger transport, hotel and restaurant services, and a few other goods and services. There’s also a 4% reduced VAT for certain items including food and drink, goods that come from a chemist or pharmacist, construction work, and even some newspapers.

Essentially, anything that is considered a necessity will have a reduced rate to keep these items more affordable for the common public.

There are also other services, for example, financial services and healthcare services that are exempt from VAT.

VAT Refunds for Foreigners Consumers

A VAT refund is the reimbursement of the value-added taxes you’ve paid on goods purchased in Europe as a non-resident. That means that as a consumer, you can get the corresponding amount you spend on a product or service back once you leave the country.

To apply for a VAT refund, non-European residents must fill out the tax-free forms wherever they’ve made a purchase. This form must be validated by customs within three months of the purchase date.

However, you must inquire about VAT refunds at the time you make a purchase as refund procedures may vary from one store to another. The one thing that remains constant is that the forms will need to be filled out while the goods are being purchased.

To fill out a form, you’ll need to show your passport or identification papers, otherwise, the retailer won’t sign the VAT document for your refund. If you’re staying in the country longer than three months after the date of purchase, your goods must be exported to your home country.

Not all retailers offer the VAT refund form. However, it’s usually advertised if they do. It’s also important to keep in mind that not all goods will be applicable, such as hotel accommodations, taxi fares, etc.

Spain VAT Obligations for Businesses

For businesses and entreprenuers selling goods or providing services, nearly everything is taxable. Therefore, if you’re taking over or starting a new business in Spain, you’ll need to oblige to the current VAT rate. You’ll also need to register prior to moving forward with any business activity, otherwise, you’ll face some serious penalties.

Once you register for your VAT in Spain, you’ll need to proceed with the following:

  • Issue and deliver complete invoices to all who are involved in your supply chain, including the consumers. Keep a copy for yourself as well
  • Request invoices from all supplier to keep for your records and so you can deduct the VAT paid
  • Maintain the following for your record books: Issued and received invoices, investment/fixed assets, and intra-community transactions
  • File the proper periodical tax returns, monthly or quarterly, and within the mandated time frames

Which Services Are Exempt from Spanish VAT?

There are several activities and services that are exempt from the Spain VAT. The primary ones that all consumers and business owners need to know include:

  • Education provided by the state or a licensed body
  • Tutoring for subjects included in the current curriculum. This applies to all educational levels
  • Sporting services that are provided by public entities or associations
  • Cultural services, including museums, libraries, seminars, and even conferences
  • All work done by artists, writers, and composers, and all translators of artistic and scientific works
  • Insurance
  • Postal services
  • Financial services
  • Healthcare services

The Spanish VAT isn’t as confusing or intimidating as it may seem. However, it is a mandatory part of being a consumer or business owner in the country, and therefore important to understand.

Remember, there are penalties as a business owner for neglecting to pay your VAT.  

If you have more questions or concerns about how Spain’s VAT rate will affect you as an expat, reach out to us today. We have an entire team of relocation experts that can help you with every step of the moving and business-starting process in the country.