Update On The Spanish Tax Reform

The income tax rates and thresholds will change next year, under reforms aimed primarily at lower income individuals and families.  There are some other changes which may affect you.

The income tax rates and thresholds will change next year, under reforms aimed primarily at lower income individuals and families.  There are some other changes which may affect you.

The Spanish government released its draft tax legislation in June.  Following on from this, in August it approved three laws which include some additional changes to those in the original proposals.  

The reforms will apply from 1st January 2015.  However the laws still need to approved by parliament and so may change.    

According to the government, the reform simplifies and modernises the main taxes in order to foster savings and investment.  The key reforms affecting expatriates in Spain are –

Income tax

The general income tax scale rates and bands will be modified. The current seven income tax bands will be reduced to five, and tax rates reduced over 2015 and 2016.  

The minimum tax rate is reduced from 24.75% to 20% in 2015 and 19% in 2016.  The top rate will fall from 52% to 47% next year and 45% the following one.  However the new top rate will apply from income over €60,000, as opposed to €300,000 as currently.

Andalucía and Cataluña have higher rates of local community tax, so the income tax rates are higher.  The current top rate in both regions is 56%.

The government calculates that the average income tax burden will reduce by 12.5%.  In particular, taxpayers with annual income of less than €24,000 will see their income tax reduced by 23.5%, while those earning under €30,000 will pay 19.34% less tax.

Contrary to the original proposals, the 60% deduction against net rental income for residents is not reduced to 50%.

Savings income

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 will be taxed at 22% and 21% respectively, and anything over €50,000 at 24% then 23%.  

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%. From 2015, all capital gains, regardless of the holding period, will be taxed at the savings rates as above.

One of the most significant additional changes is the exemption for individuals over the age of 65 on all capital gains, provided the proceeds are used to buy a pension annuity.  There appears to be no legislation to restrict main home relief for the over 65s in any way, including any requirement to buy an annuity.

Indexation will no longer apply on the sale of a property from 1st January 2015.

Property

The tax reduction for purchasing a new build will be removed.

The VAT rate on new builds will increase from 4% to 10%.

Inflation relief for properties purchased before 1994 will be eliminated.

Corporation tax

The corporation tax rate will be reduced from 30% to 28% in 2015 and 25% in 2016.  Newly created companies will pay 15% corporation tax rate for the two first years.    

VAT

The government decided not to increase the rate of VAT.

Succession tax

There are no proposed changes to succession and gift tax in the tax reform and draft legislation.

On 3rd September the European Court of Justice released a ruling stating that Spain has failed to fulfil its obligations regarding succession and gift tax under the Treaty for the Functioning of the European Union and the Agreement on the European Economic Area.  Basically, by allowing differences in the tax treatment between resident and non-resident beneficiaries, they have breached the EU treaties, particularly involving free movement of capital.

Spain has been told to comply with this ruling, but at this stage it is unclear when, or if, Spain will make changes.

The new lower rates of income and savings tax are very welcome.  However since the main aim is to help those on lower incomes, those with savings and investments still have need of specialist tax planning to protect their capital, income and assets from tax.  The reforms do not address wealth tax, and we need to wait and see what, if anything, the government decides to do with regards succession tax following the court ruling.  

As always, with tax planning in Spain, remember that it is important to seek expert and personalised advice, to establish what would work best for you in the short and long-term.

8 September 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.