Understanding Spanish tax affairs are very complicated, as with most countries – especially regarding UK pensions. The Spanish tax authorities can impose severe fines if tax is not paid and declared in the correct way.
Considering over 1 million expats live in Spain, it is important to understand tax legislation properly. Legislation changes annually, which makes this hard to achieve, but we update our records on a regular basis to ensure the information we provide is applicable today.
This page explains Spanish tax legislation in plain English, cutting out the jargon and explaining things simply.
The areas we will cover include:
General Tax Information
- Reporting for foreign assets.
- Spanish tax position for residents including the definition of a tax resident, income tax rates, savings tax rates and personal allowances.
- Spanish tax position for non-residents.
- Spanish tax secrets – ‘the Beckham Law’
- Other taxes including CGT, IHT and gift tax, wealth tax, IVA/VAT, Corporation tax and social security.
- Spanish Compliant Bonds
UK Pension Information
- UK Pension Options
- Taxation on UK pensions
- Taxation on QROPS
- Problems with QROPS
- Should I transfer to a SIPP or QROPS?
It is important to note that the information provided on this website is just a guide. Hence, before making any decisions we advise engaging with one of our expert independent financial advisers and seek tax advice from a specialist, to discuss your personal requirements. CLICK HERE to request a call back.
Foreign assets reporting law in Spain
Since March 2013, anyone living in Spain must declare their assets in excess of 50,000 EUR outside of Spain. Failure to declare your assets can result in serious penalties or even criminal charge, if the tax avoidance is in excess of 120,000 EUR. Assets include the likes of property, shares, life insurance policies, assets in a bank account such as ISAs and so on.
The Spanish law implemented this rule to increase Spanish tax revenue while also reducing levels of tax avoidance.
As a result, many of the assets held offshore will no longer be tax efficient in Spain. It’s important that you speak to an independent financial adviser to explain how you can make these assets more tax efficient. CLICK HERE to request a call back from one of our highly experienced financial advisers.
Spanish Tax Position for Residents
All individual tax residents in Spain are taxed on their worldwide income at progressive rates. It is important to note; the Spanish tax year runs from 1st January to 31st December.
If you have been living in Spain for more than 183 days in a calendar year, you are deemed as a resident in Spain for tax purposes. This is also the case if your spouse is tax resident in Spain, your economic interest is in Spain or your main interest is in Spain which could include things such as your family etc.
Income tax for Spanish residents: 2020-2021 income tax bands are as follows for annual earnings between:
|0 – 12,450 EUR||19%|
|12,450 – 20,200 EUR||24%|
|20,200 – 35,200 EUR||30%|
|35,200 – 60,000 EUR||37%|
|60,000 EUR plus||45%|
Please note, tax rates can vary depending on the region where you live.
Savings tax rates are as follows:
|0 – 6,000 EUR||19%|
|6,000 – 50,000||21%|
|50,000 EUR plus||23%|
Please note, residents of Spain are subject to additional income tax when filing their annual income tax return between 2 – 4% depending on the value.
Personal allowances are as follows:
- The basic personal allowance for under 65-year olds is 5,500 EUR per year. The allowance increases to 6,700 EUR if you are over 65 and increases again to 8,100 EUR if you are over 75.
- If you have children under 25 living with you that earn less than 8,000 EUR per year, then you can claim an extra allowance of 2,400 EUR per year for the first child, 2,700 for the second and 4,000 for the fourth child.
- If a grandparent or parent lives with you, you can claim an extra 1,150 EUR if they are earning less than 8,000 EUR per year only if they are over 65 years old. You can claim an allowance of 2,550 EUR per year if they are over 75.
- If you are married, you can choose to be taxed separately or together. The married couple annual allowance is 3,400 EUR which is known as ‘declaracion conjunta’.
Spanish Tax Position for Non-residents
If you live in Spain less than 183 days per calendar year, you will be classed as a non-resident in Spain for tax purposes. Non-residents only pay tax on income earned in Spain, not worldwide assets. Your income is taxed at a flat rate of 24% for non-EU citizens and 19% for EU citizens. To apply for non-resident income tax status in Spain you must complete a Modelo 149 form. To make your annual declaration, use Modelo 150.
Special Expat tax rates are known as ‘the Beckham Law’
This Spanish tax law is named after English footballer David Beckham as he was one of the first people to ever use it. The law applies to everyone but was designed to attract footballers who didn’t want to fall under Spanish tax rules and pay Spanish tax on worldwide assets if they lived in Spain over 183 days a year. It has been applied to expatriates since January 1, 2004.
The law allows people to choose whether they are taxed as a resident or non-resident of Spain so long as certain criteria are met, such as:
- A person cannot have been resident in Spain over the last 10 years.
- Must have moved to Spain to take up employment under a contract.
- The company you work for must be a Spanish company or must operate through a permanent establishment through Spain.
- Must not have been in Spain longer than 6 months before applying.
Under ‘the Beckham rule’, Spanish income is taxed at a rate of 24.75% on gross income only arising in Spain. There is no Spanish income tax on any income arising outside of Spain including foreign pension income.
Inheritance and gift tax (succession tax)
Succession tax in Spain has been changed so that non-residents are now treated the same as residents. There are certain limits on who you can leave your property to. The rates vary between 7.65% – 34% depending on where you live in Spain.
Wealth tax is a tax based on the market value of assets that are owned by an individual. In Spain, the rate of wealth tax varies between 0.2% – 2.5% (Andalucía 3.03%). Wealth tax only applies if your wealth is over 700,000 EUR. Non-residents will only pay wealth tax on assets in Spain while residents will pay wealth tax on worldwide assets. Spanish tax residents receive an extra €300,000 deduction.
There are many methods that can reduce your tax liabilities in the correct manner, although if done incorrectly you could face serious consequences and penalties. If you have any concern regarding how your assets may be taxed now or after death, we recommend you speak to tax experts or independent financial advisers. CLICK HERE to open up a no-fee, no-obligation discussion with us about your financial situation.
You have to pay 21% IVA (VAT) regardless of your annual turnover on goods and services. It has to be paid every January, although it needs to be recorded every quarter and annually via the VAT declaration or Modelo 390. You don’t have to submit a VAT return nor are able to reclaim VAT on your own costs if you provide exempt services. You may be exempt from paying VAT if you provide business services outside of Spain but within another country in EU that you pay VAT in.
Corporation tax is subject to a rate of 25% in Spain, although newly formed companies only pay 15% in the first 2 years. Business tax returns need to be done every 6 months, 25 days after the accounting period.
If you are registered as self-employed also known as ‘autonomo’ then you will need to contribute 286.15 EUR a month if you earn over the Spanish minimum wage of 9,080 EUR. This entitles you to health care, and a pension if you have paid into the scheme for over 15 years. You can pay additional contributions to receive a higher pension.
Discounts apply under certain circumstances. If you have not registered as autonomo in the previous 5 years, you can apply for an 80% discount for the first 6 months, 50% discount for the following 6 months and 30% discount for the remaining 3 months. This benefit also applies to those under 30 years of age.
Spanish Compliant Bonds
Using Spanish Compliant Bonds offers a direct tax advantage. Specifically-designed plans for expats in Spain offer income tax and succession tax advantages. The Hacienda recognises them as tax-efficient. Probably the best way to illustrate this is by a direct comparison between non-compliant investments and Spanish compliant investments.
Mr Expat invested €100,000 in a non-compliant offshore investment bond in September 2019, and a year later the bond had grown by 10% to €110,000. Good news so far, until the taxation is considered as follows:
- No withdrawals have been taken at all.
- The Gain is €10,000, taxable as savings income (renta del ahorro).
- The first €6,000 is taxed at 19%, the remaining €4,000 at 21%. The calculation needs to be made by Mr Expat (or he could pay a Gestor or Accountant to do it) and the tax paid on the annual tax return.
- The total savings tax bill would be €1,140 + €840 = €1,980 (19.8% tax).
Had Mr Expat invested in a Spanish Tax Compliant Bond instead, no savings tax would be payable as no withdrawal was taken and he would not even need to declare the plan to the Hacienda.
Spanish compliant bond taxation
Firstly, if no withdrawal is made, there is no tax to pay – a huge saving in tax.
Now assume the €10,000 gain is withdrawn. The important consideration here is that partial withdrawals are apportioned partly between “redemption of capital” (from the original investment) and partly from the gain.
Most clients we meet wrongly assume the tax would be the same as their current non-compliant investment of €1,980 (19.8% of the gain). But this is not the case at all. The tax due would be reduced significantly as calculated in the three stages below:
- €110,000 minus €100,000 = gain €10,000, straightforward so far.
- New value €110,000 / gain €10,000 = 9.09% Therefore €10,000 x 9.09% = €909 (slightly confusing but bear with me).
- The €909 is the taxable gain as the Hacienda sees it. Therefore €909 taxed at 19% = €172.71 (1.72% of the gain).
Mr Expat would be taxed €1,980 in a non-compliant investment even if no withdrawals had been made, whereas in a Spanish tax compliant bond he would only have a tax bill of €172.71 even when taking the full €10,000 and zero if no withdrawal was made. A tax saving of €1,807.29 in the first year.
This is a spectacular difference in a country’s treatment of investments where tax is concerned.
If these dramatic tax savings have not made your ears prick up, then consider these additional advantages of Spanish compliant investments:
- No need to declare on Modelo 720.
- They are “tax-compliant” as seen by the Hacienda.
- Tax is calculated by the bond provider and paid directly to the Hacienda on your behalf with no need for you to do any calculations or to pay someone else to do it.
- No need for probate on death.
- Multiple currencies available €, £, $ etc.
- They are Inheritance Tax efficient.
- Large range of available investments whether you like investment risk or not, including some capital protected funds for low-risk investors.
Your current investments may be causing you problems with non-declaration or draconian tax bills. The time to review your investments in line with your Spanish tax Residency is now. CLICK HERE to request a no-fee, no-obligation call back from one of our independent financial advisers.
UK Pension Options
- Retain the existing benefits
- Transfer to an overseas scheme (ROPS)
- Transfer to an alternative UK scheme (SIPP)