Taxation is the price which civilized communities pay for the opportunity of remaining civilized. ~ Albert Bushnell Hart
Life is about tradeoffs. In exchange for living in a safe, secure and beautiful country with a reliable and affordable healthcare system, you'll have to deal with complicated taxes in two countries. Spain, like the U.S., taxes its residents on worldwide income. Taxes in Spain can be complicated with high (painful) penalties for anybody who either doesn't declare or pay the correct amount.
Spain is one of the most popular destinations for foreign nationals to relocate. Mallorca is the largest of the Balearic Islands, an autonomous region in Spain. This is not the least expensive place to live in Spain but is equal to Lisbon, Paris, and Athens. Staying current with tax regulations is made difficult because the Spanish government is regularly changing its tax rules, and usually those most affected are expats holding significant assets abroad. This article is a comprehensive guide and also subject to change.
The Tax Year #
Spain's tax year for individuals is the same as in the U.S. - January 1st through December 31st each year. Spanish tax residents are required to complete a Spanish tax declaration, or Modelo 100. The deadline is until 30th of June. In 2024, it is until 1st of July because the 30th of June is Sunday.
In order to obtain the full credits allowable, your accountant or Maria can provide advice on the best timing but, in general, you may file an extension in the U.S. and then take the taxes paid in Spain off your current year.
Am I A Tax Resident of Spain? #
As with all things to do with Spain, the answer to this question is conditioned on your personal circumstances and type of visa you possess. In general, you are considered a tax resident in Spain if one or more of the following situations applies to you:
- You have spent more than 183 days in Spain within a single calendar year, regardless of whether or not you are formally registered. Sporadic absences are considered as time spent in Spain unless you can prove your tax residency in another country; and/or
- Your business or your main economic interests are directly or indirectly in Spain. That applies when your primary professional activities are conducted in Spain - - - essentially, if you are self or otherwise employed working in Spain. Yes, yachties may be considered tax residents depending on circumstances. And, famous celebrities have been "named and shamed" for not paying the high taxes in Spain; and/or
- Spanish tax law presumes that a taxpayer is a tax resident in Spain when their non-legally separated spouse and their dependent children are tax resident in Spain unless this presumption can be proved otherwise.
We suggest you contact our tax advisor, Maria Garcia of MG Abogados to determine your qualification and potential remedies. You may qualify for the Beckham Law which refers to a special reduced tax regime that benefits foreign workers who move to Spain and become tax residents. It limits the taxation to Spanish sources of income (employment and self-employment income considered Spanish sourced income) wtih a flat tax rate of 24% for taxable income up to €600,000 and 47% for taxable income exceeding €600,000.
Spanish Income Tax #
In simple terms, Spanish tax residents are liable and obligated to pay income tax on their worldwide income, once the personal allowances have been taken into account.
Non-Residents
As a non-resident of Spain, you are only required to pay tax on any Spanish income (such as rental income from a Spanish property). The income tax for non-residents is charged at a fixed rate with no personal allowances or deductions. It's important to understand whether or not you are a Spanish resident because this has a significant impact on taxes you are required to pay.
Two Categories
Under Spanish tax law, your income is split into two main categories:
- Income from general activities
- Income from savings
The total income from each category is classed as the base, after which deductions and allowances can be made. I'll share an insight here: Spain does not allow for as many deductions as the U.S. But the way of life is valued far higher to many people's peace of mind.
Foreign Asset Law Reporting in Spain #
If you live in Spain and own assets in excess of €50,000 outside of Spain, you are required by law to declare those assets up and until December 31st of the previous year to the Spanish government by March 31st each year. Failure to correctly declare any assets outside of Spain usually incurs penalties. From 2022, these penalties have been reduced considerably.
Assets which are required to be declared include:
- Assets held in any bank accounts
- Property and rights over properties
- Shares in companies or stocks
- Life insurance policies
- Cryptocurrencies
The assets may be able to benefit from a variety of tax-efficient vehicles which could help you reduce any unnecessary tax payments. If you are unsure of what you need to do, or you have failed to declare any assets, you should seek advice from our Spanish tax expert, Maria Garcia of MG Abogados.
Spanish Tax Rates #
Spanish tax residents are taxed on all worldwide income which is not included as part of the savings income. This includes income from employment (salary or contracts), pensions, rental income and potentially income from gambling.
The Spanish income tax has two parts: National Tax and a Regional Tax. Typically, each amount is the same. There may be regional variations which makes contacting Maria a good idea.
- For income up to €12,450 19%
- From €12,451-€20,200 24%
- From €20,201-€35,200 30%
- From €35,201-€60,000 37%
- From €60,001-€300,000 45%
- Income over €300,000 47%
If you file within 6 months of obtaining residency, the Beckham Law can reduce your tax rate to a flat 24% for up to 5 years. Maria is best able to advise you on the local Comunidades Autonomas and file the necessary paperwork.
Spanish Tax Personal Allowance #
If you are a Spanish tax resident, you will receive a personal allowance for your Spanish income tax (from savings and general income). As an example, for Spanish tax years 2022 and 2023, there was a basic personal allowance of
- €5,550 for people under 65 years of age.
- €6,700 for people between 65-75 years of age
- €8,100 for people over 75 years of age.
There are also other allowances including
- disability
- married couple
- children (depends on the number of children under age 25 living with you)
- 1st child €2,400
- 2nd child €2,700
- 3rd child €4,000
- 4th child €4,500
- each additional child if under 3 years of age €2,800
There may be regional variations. We recommend contacting Maria Garcia for clarity and to assist in filing to appropriate forms as needed.
Tax on Income on Savings #
Your saving income includes any income from:
- Interest
- Dividend payments
- Life Assurance Policies
- Annuities
- Gains from the sale or transfer of assets
Spanish tax rates on savings income (from 2023 and will be revised)
- Income up to €6,000: 19%
- From €6,000-€50,000: 21%
- From €50,001-€200,000: 23%
- From €200,001-€300,000: 27%
- Over €300,000: 28%
Spanish Tax on US Pensions - Retirees #
The US has a tax treaty agreement with Spain. This avoids double taxation issues. In certain cases, foreigners may face double taxation for the income they obtain from abroad and within Spanish territory. Income sources are taxable when the individual is a resident in a foreign country. Short-term visitors do not need to look for a tax treaty or fill in tax returns.
When a foreign retiree faces a double taxation issue, the Spanish government will be the resident country to facilitate resolution. It is typically made via deduction or exemption. For clarification and to have a Spain lawyer who specializes in tax, we recommend Maria Garcia. You can email her directly >> Email link for direct access to Maria.
For more on the US-Spain Tax Treaty, click here >> Link to IRS website for treaty and more.
Spain - Wealth Tax #
Much is discussed about the wealth tax. In the U.S., a wealth tax has never been implemented. We can argue the pros and cons but, for this article, we want you to understand that Spain, France, Norway and Switzerland do. This tax is designed specifically for people who hold significant worldwide wealth, but are resident in Spain. This has pushed wealthy individuals to live in Spain on the 90 day rule with no residency.
The tax amount is calculated against the declared worldwide assets held after a tax-free allowance of €700,000, (from 2024, €3,000,000 when you are a tax resident in the Balearic Islands). This allowances also applies for non-resident in Spain. Spain does not recognize Foreign Trusts as a financial instrument, in most cases. You will need to understand your tax treatment in Spain.
The tax does not exceed 60% of your annual income but that can still take quite a chunk if you are not familiar with paying this every year. According to European Tax Blog, "A key difference in tax treatment is that non-residents cannot apply the so-called “tax shield”. Basically, the “tax shield” allows Spanish-resident taxpayers to reduce their Wealth Tax liability (by up to 80%) so that the sum of what they have to pay in Personal Income Tax and Wealth Tax does not exceed 60% of their annual income. In principle, this rule is not applicable to non-Spanish residents, who are not liable for Personal Income Tax in Spain. In a recent decision (appeal no. 432/2020), the High Court of Justice of the Balearic Islands ruled, based on the CJEU’s case law, that preventing non-residents from applying the joint limit for Personal Income Tax and Wealth Tax also constitutes unlawful discrimination that is forbidden by the EU law."
If you want to live in Spain full-time and want to structure your assets. Here's a link to see Spain's list of jurisdictions where you will have issues with the Spanish tax authorities if you hold any assets or interests in companies >> List of Non-Cooperative Jurisdictions. For a more comprehensive conversation, we recommend you reach out to Maria Garcia, a tax attorney who specializes in international tax law. She is able to provide reliable advice and file any paperwork needed in coordination with your US accountant. To learn more about Maria's law firm, click here >> MG Abogados.
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By Affordable Mallorca Team
9 April, 2024
