Taxes are an inevitable part of the adulting experience. Moving to Spain won’t make them go away – but you’ll be surprised to see how manageable it can be there instead.
Spain has easily become one of the most popular destinations for foreign nationals to relocate anywhere in the world. The gorgeous landscapes, an abundance of food, and outgoing people make it an attractive place to spend time in. If you’re currently living in Spain or have plans to, understanding the many different taxes in Spain is vital to get by. Staying abreast of tax in Spain is made harder still by the Spanish government which is regularly changing its tax rules, and often those most affected are expats holding significant assets abroad.
Taxes in Spain can be very complicated with the potential for severe penalties for anybody who fails to declare and pay the correct taxes in Spain. Among many things to take note of, you’ll want to consider how the implications will affect your home country’s expat taxes and also understand the ins and outs of how Spain taxes for expats and those living in the country.
How the Spanish taxation system works
Understanding taxes should not be that complicated. Unlike other countries with a complicated tax calendar (for example, some European regions), the Spanish tax year goes from January to December which corresponds to a natural calendar year.
This is one of the things in which taxes in Spain are quite similar when compared to the ones in Europe. Understanding the duration of the different tax obligations that will arise according to what you do in the country and your situation in general can help you plan ahead or set aside time to comb through your books.
Having that calendar schedule means that all the tax obligations that are created from the 1st of January to the 31st of December are packed together, and you will have to declare and pay them during the following year.
Foreign individuals who become Spanish residents are subject to Spanish Personal Income Tax (PIT) on a worldwide basis. Non-residents will be subject to PIT, but only on income arising and capital gains obtained from Spanish sources. A special tax regime for inbound assignees might be available for those individuals who become Spanish tax residents as a consequence of their assignment to Spain or of acquiring a director position in an entity, provided certain requirements are met.
How is it different from other European countries?
While Spain shares a close proximity with her neighbouring European countries, the taxation systems for each are divorced from each other. There are different types of taxation and the levels of that taxation, depending upon whether the person liable to the tax is resident in the EU, the European Economic Area, or neither.
While most people who buy property in Spain are nationals of EU member states, it is also useful to focus on the extent to which those who are not resident in the EU are treated differently from a taxation perspective, as that is the most likely position of UK nationals in the not too distant future.
Why does Spain collect less income tax than its EU neighbours?
Spain collects significantly less tax than most of its EU neighbours: measured in terms of the contribution to GDP, at 34.6%, Spain’s is almost six percentage points short of the average, which is 40%. The biggest difference is income tax (IRPF), where Spain’s contribution is two percentage points below that of its neighbours.
Some experts attribute this shortfall to the generous exemptions, deductions and rebates available in Spain, as well as to widespread fraud. It is a similar story with sales tax (IVA), where Spain collects around half a percentage point less than the EU average contribution, says the latest report from the EU’s statistics office, Eurostat. Access here the complete list of taxes that residents and non-residents must pay in Spain.
Sales tax collection has improved in Spain over recent years, boosted in part by increased consumer spending, which has partly driven growth over the last two years. But sales tax still contributes half a percentage point less toward GDP than the rest of Europe, and there are any number of special regimes for the hospitality and tourism sectors where lower rates of sales tax are applicable.
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