Tax rises were implemented in Spain in 2012 in the wake of the economic crisis. They were meant to be temporary, and there is now talk of reducing the tax burden for Spanish taxpayers.
Tax rises were implemented in Spain in 2012 in the wake of the economic crisis. Income tax rates are up to 52% (56% in Andalucía and Cataluña) and tax on savings income hits 27%. Wealth tax was re-instated. They were meant to be temporary, and there is now talk of reducing the tax burden for Spanish taxpayers.
Spain's Expert Tax Committee has issued a consultation document proposing a number of tax reforms. The core of its proposals is a substantial reduction to the rates of direct taxes and social security contributions. This will be funded through a reduction in tax expenditure, and increases in environmental and indirect taxation.
No changes are expected to become effective before 1st January 2015, but it could lead to interesting discussions as we approach the Budget in September.
The first proposal is to reduce the number of personal income tax brackets to a maximum of four. It is proposed that the current maximum top rate of income tax of 52% should be lowered and not exceed the EU average of 45%. The lowest rate should be around 20%, compared with 24% today.
In order to pay for the lower rates of income tax the committee suggests reducing tax credits and exemptions. In particular, they propose eliminating the partial exemption relating to dividends and profits-sharing. Other possible measures include eliminating the inflation adjustment applied in the calculation of capital gains on real estate and reviewing the treatment of personal and family allowances.
The Experts recognized that wealth tax has a negative effect on savings and the tax revenue is low. They therefore proposed that wealth tax should be eliminated.
The committee proposed a minimum taxation on succession tax throughout Spain, with tax rates set between 4% and 10%. They propose, however, to remove or drastically reduce the rebates currently available, for example the reduction of tax base for kinship, rebate for inheritance of the principal residence of the deceased etc.
The proposal is to maintain the current tax treatment of pension funds.
The committee recommended a progressive cut in the rate of corporation tax rate from 30% to around 20%.
To pay for the lower rate tax, the various corporate tax shelters would be reduced so that the amount of corporation tax collected from a company is broadly in-line with the proposed new corporation tax rates.
The committee advised eliminating the current special regime for small companies, arguing that it deters companies from growing and benefiting from economies of scale, with adverse effects on productivity.
Social security contributions
The committee suggested a 3% cut in social security contributions to reduce the cost of labour for employers, thereby fostering job creation.
VAT and excise duties
To finance these measures, the committee recommended that indirect tax, for example on tobacco and alcohol, should be raised. The tax rate on diesel fuel should be brought into line with the petrol tariff.
It also called for VAT to be raised to 21% for some products and services currently subject to the 10% reduced rate (VAT for housing, the tourist sector and public transport services should be excluded).
Real estate tax
The Experts called for a far-reaching reform of the country's real estate tax, which includes both property income and gains on sale (Impuesto sobre Bienes Inmuebles/IBI). Notably, they encouraged the Government to remove stamp duty. However, until the reform is completed, all income from property should be taxed at the savings rate and not at the progressive rate.
Spain's Finance Minister, Cristóbal Montoro, has confirmed that the proposals will be looked at closely by the Government with a view to phasing in cuts to individual income tax from 1st January 2015.
Will this go ahead?
The Committee of Experts have put forward a wide range of ideas for the Government to consider. The view is that the Government will look at the report and seek to move towards implementing its recommendations. Given Spain’s economic situation it is difficult to imagine all the proposals being implemented at once. Bearing in mind that the Autonomous Communities also have separate tax raising powers and can vary the state tax rates and rules, these proposals may not be as beneficial as they initially appear, and, even if implemented, may be varied considerably.
Taxpayers should continue to plan using the current rules and remain close to a professional adviser to they stay abreast of changes that could affect them.
Whether rates improve or remain as they are, it is possible to reduce tax on your investment income and assets in Spain if you seek specialist advice.
28 April 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.