It is vital to fully understand the Spanish tax system to avoid misunderstandings and ensure that you do not make inappropriate decisions with regards to investments, business and private transactions. Not knowing the system is not an excuse and a bad decision made in ignorance can lead to higher taxes in the future or even fines and penalties.
Here is a simple guide to some of the key taxes which may affect you whilst living, doing business or even just being on Holiday in Spain.
Value Added Tax
At present, the general rate of VAT is 21%. This is the rate charged on most supplies. There is also a reduced rate for certain products and services of 10% and super reduced at 4%.
Registration with the tax office is compulsory for companies or individuals selling products of services which fall within the scope of this tax. It is important to point out that, unlike in some countries, businesses supplying goods or services subject to VAT must register from commencement of trade, as there is no lower threshold limit.
Taxable profits generated by companies are liable to corporation tax. The standard rate for 2014 was 30%, reduced to 28% for 2015 and 25%.
Taxable profits of companies with a turnover below € 5 million were taxed at 20% but this has now been eliminated except for a transition in 2015 for the first €300.00 of profit at 25% and the remainder of the profits at 28%. Please note, this tax can be reduced for businesses meeting certain targets such as increasing or maintaining their number of employees.
Payments on account may be required and the total of the corporation tax charge is due within the six months and 25 days after the end of the financial year.
This tax arises when individuals have any the following sources of income:
- Income from employment
- Income from current assets (interest, dividends, etc)
- Income from property (rentals)
- Income from economic activities (business profits)
- Capital Gains
- Deemed income (on the benefits derived from certain assets)
At present, residents are taxed at a maximum of 20% on certain types of income such as savings income and capital gains. On the remaining sources of income the minimum tax rate is 20% and the maximum is 49%.
Resident taxpayers are entitled to a minimum personal allowance of €5,550. This amount increases after the taxpayer reaches the age of 65 and 75. Allowance for children is 2.400 (first) 2.700 (second) 4.000 (third) 4.500 (each further) Further allowances can be claimed for dependants.
Other deductions may also be available. It is worth noting that a deduction may be made for the amounts paid for the purchase of your main residence, amounting to 15% of the amount invested up to a limit of €9,015 per year. This also applies to the amounts paid in relation to the mortgage obtained when acquiring the house.
Payments on account may be required for sole traders and the total income tax for each calendar year is due by 30th June of the following year. 40% of the remaining payment due may be postponed until the following November.
Taxable transfers of buildings and land are taxed at the rate of 8%, and other items are taxable at a lower rate. First transfers of property from the developer are subject to VAT instead of stamp duty at 10% for buildings and 21% for land.
Stamp Duty also arises at the rate of 1% on share capital, either at the incorporation stage or when share capital increases are made.
Inheritance and gift Tax
This tax arises when individuals receive an inheritance or a life time gift. The tax payable depends on the wealth of the recipient as well as on the value of the transfer. The impact of this tax is considerably less on residents given the reliefs available, so non-residents beware!
Local Taxes on Property
In addition to the above there is council tax due on the ownership of urban property. This tax is calculated on the rateable value of the property (valor catastral) and the rates range between 0.4% and 1.3%.
Local tax also arises when the property is sold, this charge considers the rateable value increase during the period of ownership.
Local Taxes on Businesses
Business rates may also be payable to the local authorities. However, at the present time small and medium sized companies are exempt from this tax.
It is always advisable to seek professional advice when entering into certain transactions either as a private individual or a business person. Similarly, being non resident does not exclude one from many of the aforementioned tax-traps, and therefore anyone planning to acquire any assets in Spain should likewise seek professional advice at the earliest opportunity.