You must know about the tax in Spain you must pay if you plan to live and work in the area. Your residency, if you have real estate, and other assets that you hold will all have an impact on this. Taxes on individual income, corporate revenue, inheritance, and property are a few potential charges.
In this article, we will be giving you the information you need regarding Spanish tax regulations. According to your residency status, you can be liable for tax in Spain on your international income and assets if you are an expat investor in Spain. Here is a quick summary of Spain’s taxation of foreigners.
Residency status and tax obligations
Depending on your residency status, you may or may not have to pay taxes on your global or income earned in Spain. A person who has lived in Spain for at least 6 months in a year qualifies as a Spanish resident. This does not necessarily need to be a continuous residency period. If your primary vital interests are in Spain, you will also qualify as a local resident for taxation purposes.
Residency requirements for tax purposes
If you are planning to live or work in Spain, you need to know if you are considered a resident for tax purposes. This will affect how much tax you pay and what income and assets you need to declare.
According to Article 9 of Law 35/2006, the Spanish Tax Agency will treat anyone who meets one of the following criteria as a resident taxpayer:
- Spending more than 183 days each year in Spain. The days do not have to be consecutive, and temporary absences are considered as long as the tax residency in another country has been established.
- Having the core of your economic interests, either directly or indirectly, in Spain. This means that more than 50% of their income or activities are generated or located in Spanish-speaking territory.
- Having a child or children under age 18 who regularly reside in Spain. When this criterion is met, it is generally assumed that Spain is the place of habitual residence, barring proof to the contrary.
If you meet even one of these requirements, you qualify as a fiscal resident and are liable to pay tax in Spain on all of your worldwide income. That is, on all of the money you make both in Spain and abroad. Additionally, you must pay additional taxes such as the patrimony, succession, and donation, as well as the patrimonial transmission taxes, among others.
Determining tax residency in Spain
When the tax authorities in Spain determine that you are a resident according to the aforementioned criteria, you are liable to pay tax on your worldwide income and assets. This includes:
- General income, such as salaries, pensions, rents, etc.
- Interest on savings and investments
- Capital gains on sale of assets
- Wealth (if all of your assets are between €700,000 and €1 million, including the family housing allowance)
- Gifts and inheritance
You also need to declare any assets you own outside of Spain, such as property, investments, savings, pensions, insurance, etc.
As you can see, determining your tax residency in Spain is not always straightforward and may have significant consequences for your finances. Therefore, it is advisable to seek professional advice before moving to Spain or changing your residence status.
Tie-breaker rules in double taxation treaties
Double taxation occurs when two or more countries tax the same income or assets of an individual or a company. This can result in an unfair tax burden and discourage cross-border trade and investment. To avoid or reduce double taxation, Spain has signed bilateral treaties with many countries, based on the OECD Model Tax Convention.
These treaties establish the criteria to determine the tax residence of individuals and companies. Plus, allocate the taxing rights between the contracting states. They also provide methods to eliminate or mitigate double taxation, such as tax credits, exemptions or deductions.
One of the most important aspects of these treaties is the tie-breaker rules. These, are used to resolve cases where an individual or a company is considered a resident of both contracting states. This according to their domestic laws. The tie-breaker rules are different for individuals and companies, and they are usually applied in a hierarchical order.
For individuals, the tie-breaker rules are as follows:
- People are regarded as citizens of the nation in which they stay permanently.
- This is a home that is furnished and reserved for permanent use, as opposed to a short-term stay.
- If they have a permanent home in both countries, they are residents in the country where their center of vital interests is. This is where they have closer personal and economic ties, such as family, work, business or assets.
- If the center of vital interests cannot be determined, they are residents in the country where they habitually live. This is where they spend a long enough time to establish a habitual abode. As well as the frequency of their stays.
- If they do not habitually live in either country, or they habitually live in both countries, they are residents in the country of which they are a national.
- If they are nationals of both countries, or of neither country, the competent authorities of both countries must solve the dispute by mutual agreement, according to the amicable procedure included in the treaty.
For companies, the tie-breaker rules are as follows:
- Companies are considered residents in the country where their place of effective management is. This is where the key management and commercial decisions that are necessary for the conduct of their business are made.
- If the place of effective management cannot be determined, or if both countries claim that it is located in their territory, the competent authorities of both countries must solve the dispute by mutual agreement, according to the amicable procedure included in the treaty.
The application of these rules may vary depending on the specific wording and provisions of each treaty. Therefore, it is advisable to consult the text of the relevant treaty before making any tax decisions.
Income tax rates for individuals
Income tax in Spain can be a difficult issue for newcomers. When personal allowances are taken into account, Spanish taxpayers are fundamentally bound to contribute income tax on what they earn worldwide.
The only non-resident tax in Spain they must pay is Spanish income. Such as rental revenue from a Spanish property. Non-residents pay income tax at a particular rate. Also, there are no private exemptions or deductions.
Since this will have an enormous effect on the local income tax you must pay, it is crucial to comprehend if you are a taxpayer in Spain or not.
Your income splits into two main categories under Spanish tax laws: revenue from general operations and revenue from savings. The base defines as the sum of the income from each category, from which deductions and allowances may happen.
All international income that is not a component of the savings income will be taxed for Spanish tax residents. This comprises compensation from a job, pension payments, rent payments, and maybe winnings from gaming.
A national tax and a local tax make up the two components of the income tax in Spain. Each figure is typically the same, nevertheless there could be regional differences.
These are the current income tax rates in Spain:
- Up to 12,450 – 19%
- 12,451 to 20,200 – 24%
- 20,201 to 35,200 – 30%
- 35,201 to 60,000 – 37%
- 60,001 to 300,000 – 45%
- Over 300,001 – 47%
Duration of stay and tax status
As you can see with the information we have been providing, the main criterion that determines your tax in Spain status is the number of days that you spend in the country in a calendar year.
- If you stay for more than 183 days, you are considered a tax resident. So, you have to pay taxes on your worldwide income and assets to the Spanish authorities.
- If you stay for less than 183 days, you are considered a non-resident. So, you only have to pay taxes on your income and assets derived from Spain.
However, there are some exceptions and nuances to this rule, depending on your personal and professional circumstances. For example, if you have your main home or economic interests in Spain, or if your spouse or minor children live in Spain, you may be considered a tax resident even if you stay for no more than 183 days. On the other hand, if you are working abroad for a Spanish company or entity, or if you are a diplomatic or consular staff member, you may be considered a non-resident even if you stay for more than 183 days.
Dual residency and tax implications
Dual residency means that you are considered a resident for tax purposes in two or more countries. This can happen if you meet different criteria in each country. Such as. the number of days you spend there, the location of your main home or business, or family ties.
Being a dual resident can have important tax consequences. As you may be liable to pay taxes on your worldwide income and assets in both countries. This can lead to double taxation, which means paying tax twice on the same income or asset.
To avoid double taxation, you need to check if there is a double tax treaty (DTT) between Spain and the other country where you are a resident. A DTT is an agreement that establishes how the income and assets of dual residents are taxed by each country.
Spain has signed DTTs with more than 90 countries, including most European countries, the United States, Canada, Australia, and China. A DTT usually follows the OECD model. It sets out some rules to determine which country has the right to tax different types of income and assets.
If you are a dual resident and receive income or own assets that are taxable in both countries, you need to declare them in both countries and apply the DTT rules to avoid or reduce double taxation. You may also need to obtain a certificate of tax residency from one or both countries to prove your status.
Impact of double taxation agreements
Spain has signed DTAs with over 90 countries, covering most of its major trading partners. These agreements list types of income and contain provisions, with respect to each one, on the tax powers pertaining to each contracting state. In some cases, exclusive power is granted to the country of residence of the taxpayer. In others, exclusive power is granted to the country of origin of the income. Lastly, in certain situations, power is shared by the two countries, whereby both can tax the same income but with the obligation. Generally, the steps to prevent double taxation are settled upon by the taxpayer’s place of residence.
The impact of DTAs on your tax situation will depend on your residency status, the type and source of your income, and the specific provisions of the relevant agreement. In general, DTAs can offer several advantages for businesses and individuals engaged in cross-border activities with Spain, such as:
- Avoidance of double taxation. This helps reduce the tax burden on businesses and individuals by preventing them from paying tax twice on the same income.
- Reduction of tax costs for businesses. It helps to reduce tax costs for businesses operating in multiple countries and facilitates cross-border transactions by eliminating or reducing withholding taxes on dividends, interest, royalties, and other payments.
- Promotion of cross-border investment and trade. It helps to create a stable and predictable tax environment for businesses and investors. As they can plan their activities with certainty about their tax obligations in different countries.
- Prevention of tax evasion and avoidance. It helps to ensure that taxpayers are complying with their tax obligations in different countries by establishing rules for the exchange of information between tax authorities. Plus, providing mechanisms for resolving disputes.