What Does The Future Hold For Taxation In Spain?
Is Spain a high tax country?
When we think of high tax countries in Europe, places like Sweden, France, Belgium and maybe the UK come to mind. Until recently Spain would not have been on the list. When people weighed up the pros and cons of moving to Spain, few were put off because of the amount of tax they would have to pay.
The tax burden on Spanish residents has however increased. They are paying higher income taxes and higher savings taxes. They may also have to pay wealth tax. Local council tax rates have seen a progressive increase and VAT has gone up.
The top rate of income tax in Spain is now 56% (in Cataluña), 54% in Andalucía or 52% in most other regions, rates many people find prohibitive. Spain now has one of the highest tax rates in Europe.
So yes, Spain can now be considered a high tax country. Having said this, with professional guidance from a tax and wealth management firm like Blevins Franks, you may be able to use compliant arrangements which would lower your tax liabilities, sometimes considerably, depending on your situation.
So how much has taxation changed in Spain?
Just two years ago the top rate of personal income tax 43%. Today’s 52% (for most regions) is a significant increase for such a short space of time, though it does apply to a higher tax bracket (income over €300,000).
The new 52% rate of tax was announced at the end of 2011 as part of a number of measures to help reduce the budget deficit. All taxpayers have been affected as the income tax rates increased across the board. The higher the tax band you fall into, the more extra tax you are paying this year and next.
Tax on savings income also increased. This covers capital taxes like interest, capital gains on the sale or transfer of assets (real estate and securities), dividend income etc.
There are now three tax bands for savings income and capital gains: 21% for income under €6,000, then 25%, then 27% for income over €24,000.
Considering that until the end of 2009 the rate applied to all savings income was 18%, not just higher earners have seen their tax rate increase substantially in just a few years.
Note that bank interest is taxed whether you withdraw it or not. There are however other arrangements where income and gains can roll up tax free. This is a good example of why you should seek professional advice from a firm like Blevins Franks on the most tax efficient way of structuring your assets.
How many more tax rises could be inflicted on Spanish taxpayers? Although Prime Minister Mariano Rajoy has said he hopes to avoid increasing personal income tax or VAT again, he may have little choice. He has had to renege on promises not to raise taxes before.
Much will depend on if Spain has to apply for a sovereign bailout. Madrid has been resisting seeking help from the EU and International Monetary Fund (beyond the existing loan agreement to recapitalise Spanish banks), but its stricken economy and soaring borrowing costs may mean it is only a matter of time.
Bailouts come with very strict conditions, and these could easily include more tax rises.
Even if Sr. Rajoy is able to stick to his promise not to put up income tax, he could simply hike capital taxes instead. This would mean you will lose more of your bank interest, of your investment dividends and gains, to tax in future.
Then there is matter of wealth tax, temporarily reinstated for 2011 and 2012, in most parts of Spain, and now extended for another year. Could this be extended even further?
Another big taxation change in Spain over recent years has been the government’s approach to tax fraud. While tax evasion may once have been considered almost a way of life in Spain, the government is now determined to stamp it out.
People living “under the radar” in Spain – i.e. owning property and living here year round but not declaring themselves as resident – are being tracked down. The government is using land registry and utility consumption records to determine who owns property in Spain and how much of the year it is lived in, and comparing this with information supplied on tax returns.
Residents who have failed to declare offshore bank accounts are being discovered thanks to exchange of information agreements with former tax havens, including the Isle of Man and Guernsey.
A tax amnesty is currently available (it will close on 30th November 2012), an unusual move for Spain.
The government has warned that it will be much tougher on tax evasion after the amnesty. It has said that is planning to introduce a new anti tax fraud law which would impose higher penalties as well as a new reporting obligation for offshore assets.
For many expatriates, it is often still possible to legitimately lower your tax liabilities in Spain. You need to make sure you get it right by seeking professional advice from an experienced firm like Blevins Franks.
25th September 2012, updated 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.