Sometimes our careers or daily engagements dictate we relocate and it is good to understand the tax implications of where you are going, either as a resident or non-resident.
One of the most critical things to understand when relocating is the taxation system of where you are going. This will help you plan well, especially in finances. Are you considering moving to Spain as a resident or non-resident?
This article will take you through everything you need to know about the Spanish tax system. You will further understand what surrounds tax residency in Spain. Payment of taxes in Spain is inevitable for both residents and non-residents, although residence status determines the tax you’re supposed to pay in Spain.
You can pay your Spanish tax from your Spanish based income or the income you earn outside the country. This applies to the residents, while the non-residents can only pay their tax based on their Spanish income. The Spain taxation year runs from January 1st to December 31st.
The rates of taxation in the country are not the same. This is because they are done by the regional government and the states meaning they are divided into two. The variation can be on the property tax, capital gain tax, wealth tax, among others.
Tax Payment for Spanish Residents
You are entitled to tax residency in Spain if you have stayed in the country for 183 days. This also applies to anyone who has a family or a spouse in Spain. The following cases demand that you pay your Spanish income tax.
- If you are employed and get an annual income of 22,000 euros
- You receive a yearly rental income above 10,000 euros.
- You run any business or are self-employed in Spain.
- You register capital gains of up to 1,600 euros.
Also, being a Spanish tax resident, it is mandatory that you declare any assets you have abroad if they exceed 50,000 euros.
Generally, the taxation for income in Spain is made on balance left after personal cost, professional allowance, and pensions have been deducted.
Tax Payment for Non-residents
You cannot be a Spanish resident if you stay in the country for less than six months. However, that doesn’t exempt you from paying taxes.
You will have to pay taxes based on the income you earn in Spain for that specific time. The tax is charged at a flat rate meaning there are no deductions or allowances.
Also, if you are non-resident and own properties in Spain, you are expected to pay tax for the properties you own.
Taxable Incomes in Spain
1. Income from Salaries and Pensions Tax
Another term for personal income tax in Spain is Impuesto de Renta Sobre las Personas Físicas or IRPF.
Income tax in the country is split between the state and regions, as earlier mentioned. There are some regions with reduced taxes. This means that your residence determines your income tax residency in Spain.
Being a Spanish tax resident, you must pay an income tax based on worldwide employment income. Any bonuses you earn or your gross employment income will be taxed as general income.
You are required to file for your income tax returns between April 6th and 30TH June of the coming year. A harsh penalty applies to you if you fail to file your returns on time.
Agencia Tributaria is the agency responsible for regulating all taxes in Spain. They also update the taxation website. For a tax to be paid in Spain, you need to have an NIE number.
This is a tax identification number, and it’s used to collect all financial information. The number is also used in monitoring legal activities in the country.
Income tax payment in Spain applies to the following.
- Business owners or anyone with economic interests located in Spain either directly or indirectly.
- Anyone with children or spouse depending on them in Spain
- People who stay in the country for more than 183 days.
2. Capital Returns Tax
Capital returns taxation is diverse and covers the following.
- Any income you generate from disability and life income insurance.
- Any money you gain after transferring your assets
- Dividends and any income gotten from company interests. This is any capital transferred to a partnering company that exceeds three times equity. The excess amount is the one that will be taxed as a general taxable income.
Here is the taxation of different capital returns in Spain
-19% for the first €6,000
-21% for the next €6,000–€50,000
-23% for any amount between €50,000–€200,000
–26% for saving incomes exceeding €200,000
You might be lucky if you are above 65 years and are considering selling your home. The government, at times, exempts such people from tax payment. However, this applies if you are selling it to buy another house.
3. Income from Economic Activities
Are you planning to move to Spain for business or self-employment? Then you are also not exempted from paying taxes. The taxation done on self-employed people is known as freelance tax.
There are many freelancers in Spain, and that’s why the government had to impose a tax on them.
Fortunately, the tax to be paid in Spain by freelancers varies according to the work you do. Additionally, if you are starting a business in Spain, the rates you pay will be considerably lower for the first 12 months.
Generally, being in business means you must pay the tax residency in Spain just like any other taxpayer. However, the rates vary between the self-employed and those who own companies.
Your tax will be between 19% and 45% for the self-employed, based on your income.
4. Capital Gains and Losses
Owning property in Spain, whether you are a resident, or not means you have to pay tax. This tax is known as the Impuesto Sobre Bienes Inmuebles (IBI). It is tax paid from profits earned after selling properties or other investments.
This is regardless if you are a Spanish resident or not.
On top of this, property owners must pay basura or the rubbish collection tax.
On the other hand, if you decide to sell your property in Spain, you have to pay the uesto Transmisiones Patrimoniales (ITP), the property transfer tax.
Interestingly, if you are a resident selling a house to a non-resident, they will have to deduct 3% of the original price. This percentage goes to the tax authorities as income tax retention.
Here are the tax rates for capital gains in Spain.
- 19% for any earnings not exceeding €6,000
- 21% for earnings between €6,000–€50,000
- 23% for €50,000–€200,000
- 26% for any earnings exceeding €200,000
5. Wealth Tax for Global Assets
Wealth tax in Spain is paid on the 31st day of every year. The tax payment is made on the value of your assets. There has been a 1% increase in the tax band rate, although it has been approved in many regions.
This translates to a tax rate of 3.5% on every €10 million you make. The taxation applies if the total value of your properties exceeds 800,00 euros.
6. VAT / Tax on Capital Transfers
Capital transfers tax in Spain range between 5% to 11% and 6% on average. However, this will depend on the region that you are in.
These transfers can be from real estate leases or real estate transfers, which are VAT free. However, you will be exempted from paying taxes on any shares you want to transfer.
7. Real Estate Tax
If you buy a property in Spain, there are various taxes that you ought to pay. They range between 8% and 11.5%.
Regardless of whether a bank, the company is selling it or it’s a new house. The tax to be paid in Spain on real estate applies both to residents and foreigners.
8. Tax on the Increase in Value of Urban Land
Taxation on urban land in Spain is done based on the number of years and the value increased.
If the land is developed, then you have to pay a tax of 0.45. However, if you have a tenant using your land, they are the ones supposed to pay for it on your behalf.
The Bottom Line
It is no longer business as usual when it comes to paying taxes in Spain. The Spanish government has been strict and keen to ensure both residents and non-residents are tax compliant.
Failing to pay your taxes or reducing tax liability might land you in prison. The Spanish government has diversified its ways of getting fraudsters and having them prosecuted.
As a Spanish tax resident, it is wise to declare your tax, especially if you own properties fully. This will reciprocate back during the resale of that property since you will have to undergo deductions due to tax evasion.
This article has expounded on everything you need to know about the Spanish Tax system. I hope you are now well informed in case Spain has been among your planned destinations.
If you have further questions, don’t hesitate to contact us.