Earlier this year, Spain’s Expert Tax Committee released a consultation document proposing a number of tax reforms. On 23rd June the government released its long-awaited draft legislation. This article outlines the key proposed changes affecting individuals and families.
Earlier this year, Spain’s Expert Tax Committee released a consultation document proposing a number of tax reforms. This included cutting income tax rates and revamping succession tax. We have been waiting since then to find out how much the government would follow through with.
On 23rd June the government released its long-awaited draft legislation. This does include reductions in income tax rates and bands, with Treasury Minister Cristóbal Montoro explaining that “the time has come to reduce taxation for everyone and the Spanish people will now be compensated for the efforts they have had to make”. The reforms also aim to strengthen economic growth and stimulate savings and investment through a modern tax system that fosters job creation.
The key changes affecting individuals and families are outlined below. These are only proposals at this stage, and still need to go through parliament and undergo a consultation process with employers, trade unions, and other political parties. It is therefore possible that changes will be made during the process.
The general income tax scale rates and bands will be modified. The current seven income tax banks will be reduced to five from next year, with tax rates reduced at the same time and again in 2016.
The lowest rate of tax is currently 24.75%. This will reduce to 20% in 2015 and 19% in 2016. The current top rate of 52% will fall to 47% next year and 45% the following one, but the income threshold for the top rate is also reduced from €300,000 down to €60,000.
Prime Minister Mariano Rajoy has stressed that the tax reduction particularly benefits lower earners. The average income tax burden is expected to reduce by 12.5%, but taxpayers with earning less than €24,000 will pay 23.5% less tax.
Savings income rates and thresholds will also change. Currently, income up to €6,000 is taxed at 21%; income between €6,000 and €24,000 at 25%, and the excess at 27%. Under the proposals, the rate for the first tax band will reduce to 20% in 2015 and 19% in 2016; income between €6,000 and €50,000 at 22% and 21% respectively, and anything over €50,000 at 24% then 23%.
Besides bank interest, this also benefits arrangements like life assurance polices.
On the other hands, the annual exemption of €1,500 against dividend income will no longer be available, and the 60% deduction against net rental income for residents of Spain would reduce to 50%.
The special ‘Beckham law’ will no longer be available to sportsmen; for other professions employment income of up to €600,000 will be taxed at 24% and the excess at the general scale rates.
Capital gains tax
Under current rules, gains arising on assets held for less than a year are subject to the normal scale rates of up to 52%. Under the proposals, from 2015, all capital gains, regardless of the holding period, would be taxed at the revised savings rates.
Indexation would no longer apply on the sale of a property.
Inheritance tax and wealth tax
Although changes were widely anticipated for these taxes no changes have been proposed.
The corporation tax rate will be reduced from 30% to 28% in 2015 and 25% in 2016. Newly created companies will pay a 15% corporation tax rate for the two first years.
Controlled Foreign Company (CFC) regulations
CFC rules are tax anti-avoidance rules designed to stop offshore companies being used to shelter income and gains. Spain intends to introduce and apply CFC rules that will subject a foreign company to an annual tax in Spain where there is no real substance to the company, i.e. where the company is an investment company rather than a trading company. This rule will not affect life insurance policies.
A proposal has been put forward to introduce an exit tax. Typically such a tax is applied when an individual becomes non-resident and disposes of their assets within a certain time period. This concept already applies in France and if implemented as in France, which appears to be the case, will exclude life policies from the assessable taxable base.
Despite recommendations from the International Monetary Fund (IMF), Organisation for Economic Cooperation and Development (OECD) and the European Commission, the Spanish Government decided not to increase the rate of VAT.
After the high Spanish taxes of recent years, this is welcome news for locals and expatriates alike. The main aim of the income tax cuts is to help those on lower incomes, so those with savings and investments still have need of specialist tax planning to protect their capital and income from tax. We would also like to have seen succession tax improved – or at least simplified! – and the future for wealth tax remains unclear too.
3 July 2014
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 is advised to seek personalised advice.