When the Spanish budget for 2013 was announced on 27th September, most Spanish taxpayers were hoping it would not include any more tax rises, following the hikes to income and savings taxes already imposed on this year’s income.
It turned out to be fairly innocuous tax wise (unless you are liable for wealth tax), though the austerity measures, which focus on spending cuts rather than tax rises, could hit the Spanish people hard. The budget measures seek to raise almost €40 billion from public spending cuts and increased revenue.
From a tax point of view, the news reports focused on a new 20% lottery tax for winnings above €2,500. However the budget did include another measure that will affect Spain’s wealthier taxpayers – an extension to wealth tax.
Wealth tax for another year
Wealth tax had been effectively abolished in 2008 when the government announced a 100% credit. The credit was then removed in September 2011 as a temporary measure for two years. This meant that wealth tax would apply to assets held at 31st December 2011 and 2012, with tax payable in 2012 and 2013.
As Spain’s budget deficit targets slipped and slipped again, we warned there was a strong possibility the tax would be extended. The 2013 budget now includes a measure for wealth tax to apply for another year - so also for tax payable in 2014. This is expected to raise an extra €700 million in revenue for the government.
Wealth tax remains subject to regional reliefs, so Islas Baleares and Madrid may continue to apply the 100% tax credit, as they have done so far. Comunidad Valenciana (Valencia, Alicante and Castellón) no longer applies the credit.
Wealth tax is payable by residents (on worldwide assets) and non-residents (Spanish assets) based on assets held at 31st December each year. Residents have an individual allowance of €700,000, plus a main home allowance of €300,000. Married couples may have a combined allowance of €2 million. The rates of tax range from 0.2% to 2.5%.
The extension to this tax does not bode well for the higher income and savings taxes which are only meant to apply for 2012 and 2013.
If you are hit by wealth tax, or any of the higher tax rates, speak to an experienced wealth management firm like Blevins Franks to establish if you can lower your tax liabilities in Spain.
Other tax changes
The budget includes proposals to tax gains on assets held for one year at the scale rates of income tax, rather than the fixed rates, and to abolish the deduction for investment in the main home for purchases after 1st January 2013.
New anti-fraud law
Addressing the Congress of Deputies, Finance Minister Cristobal Montoro stressed the importance of the government’s new anti-fraud law to combat the underground economy and loss of tax revenues. He insisted it is the most decisive and important bill to be drafted in Spain in recent decades to tackle tax fraud.
Underlining Spain’s commitment to international transparency and exchange of tax information, Sr. Montoro said the bill introduces the legal obligation for all Spanish taxpayers to provide information on accounts, securities, assets, life insurance and real estate held or located abroad.
He praised the work of the country’s tax administration for recovering 15% more from control activities between January and July than the same period last year, and emphasised that the proposed new measures will serve to further enhance these results.
The future law is being debated by parliament.
Spain’s current deficit reduction targets, as set by the EU, are 6.3% of gross domestic product for this year and 4.5% for next.
On 29th September, Sr. Montoro admitted that the cost of helping Spain’s ailing banking sector means that this year’s deficit will come in above target at 7.4%.
Spain has already revised its deficit forecast twice for this year (it was originally 4.4%), but many analysts have been warning that it still will not be able to reach them.
Unemployment has almost hit 25%. The economy is forecast to contract by 1.5% this year and 0.5% next. This is rather optimistic considering economists polled by Bloomberg expected a decline of 1.3% in 2013. Others have it at closer to -2%.
If Spain does struggle to meet its targets, it could be forced to impose more tax rises, or at the very least keep the current temporary tax measures in place for longer than planned – as has already happened with wealth tax.
Borrowing costs also remain at unsustainable levels, and the government moving closer and closer to asking for a full sovereign bailout which usually comes with tax rises in one form or another.
For advice on effective and compliant tax mitigation arrangements in Spain speak to an adviser like Blevins Franks which has decades of experience advising British expatriates here on their tax planning.
3rd October 2012
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual should take personalised advice.