Taxation in Spain occurs at a national level and at a regional (‘Autonomous Community’) or municipal level. The Spanish taxation system was subject to a significant review in 2007 that resulted in the introduction of a new Personal Income Tax Act. The tax regime in Spain is controlled by the Ministry of the Treasury.
Tax Year 1st January to 31st December.
Spanish residents are taxed on their worldwide income (earned and unearned), capital gains from all sources and on their worldwide assets. Spain operates a self-assessment regime.
For personal income tax purposes, married couples may choose to file tax returns jointly or separately.
Income Tax Spanish residents are subject to Spanish Personal Income Tax (‘IRPF’). Individuals and couples benefit from personal allowances which reduce their liability to tax and which increase in line with the number of dependent children.
A new structure has been created for the taxation of income, which now falls into two categories: the general base and the savings base of income.
The general base includes salary and other benefits from employment, income from economic activities, and property rental income (either actual or deemed). Such income is reduced by applicable deductions and allowances. It is subject to a progressive scale which is applied to successive portions of taxable income with rates ranging from 24% to 43%*. In the autumn of 2011 a new tax bracket was introduced for higher income earners as an austerity measure, with income over €175,000 now subject to a 45% rate.
The savings base is subject to a 19% tax rate on savings income up to €6000 and to 21% on the excess and includes interest, dividends, and capital gains/losses paid to residents in Spain, together with life and disability insurance proceeds paid to Spanish residents by a Spanish entity (or an EU insurer operating on a Freedom of Services passport into Spain) where any investment element is limited to Spanish tax compliant funds.
*Some Autonomous Communities have considered increasing the local personal income tax rates to help combat the economic crisis in Spain. The following maximum rates for personal income tax have been agreed for the 2011 tax year e.g. Andalucia: 48%; Asturias: 48.5%; Cataluna: 49%.
Taxation of Investment Income
Any investment income received will form part of the taxpayer’s income tax calculation and any withholding tax deducted will be held as a credit against the final calculation of income tax due. Spanish insurers and EU insurers with a Spanish branch or operating on a Freedom of Services passport in Spain are required to withhold 19% tax on gains on payments from tax compliant insurance policies held by Spanish residents. Foreign insurance policies will be subject to income tax, and can offset losses, on an annual basis.
Generally an annual exemption limited to €1,500 is granted to resident individuals in respect of all dividends.
Life insurance in Spain is exempt from premium taxes.
Tax on Property Rental Income
Property income (provided it is not used for economic activity) is taxed as general base income. The amounts received are the gross income and may be reduced by deducting all expenses necessary to service and repair the property. These can include interest on loans used to acquire the property, depreciation expenses of up to 3% of the purchase price or its cadastral value, excluding the value of the land. There are further reductions that can be made where the property is destined to become the individual’s personal residence.