Spain is my favorite country in Europe, and it has a lot to offer investors and expats.
But for years, I resisted Spain because of the high taxes—especially its tax approach to potential rental income.
And there was some merit to that.
Taxes in Spain are a serious consideration if you’re thinking of moving here. Spain’s tax burden is about 9% higher than average among the OECD.
For a full breakdown of your tax picture in this country, join us for the Live And Invest In Spain Conference, taking place Nov. 15–17 in Valencia, Spain.
Taxes In Spain
By European standards, taxes in Spain are not bad:
· Spain is in 10th place with respect to its income tax rates (nine countries have higher tax rates).
· For overall tax burden, it’s in 14th place, with a greater tax burden in places like Germany, Greece, France, and Italy.
Spain also has a tax treaty with the United States, Canada, and the U.K. to prevent double taxation.
Here’s an overview of the top things to consider with regard to Spanish taxes, plus my advice for minimizing your tax burden.
Tax Residency
The term “tax resident” means that you’re subject to the tax regime in a given country.
You become a tax resident in Spain if you live in the country for more than 183 days per calendar year.
But that’s not all… there are a couple of other tax-residency triggers:
· Your principal business is in Spain,
· Your main residence is in Spain,
· Or your spouse or family live in Spain.
There are some upsides to being a Spanish tax resident: It entitles you to free health care in the excellent Spanish system, as well as special treatment for property taxes and inheritance tax.
Spanish Income Tax
Spain has 17 administrative units called autonomous communities (plus 2 autonomous cities: Ceuta and Melilla).
Income tax liability varies by autonomous community. They each have their own scheme of deductions, exclusions, and special allowances.
Overall, Spain’s income tax rate ends up being low by European and American standards…
Tax residents pay tax on their worldwide income and are taxed in accordance with brackets that run from 19% to a maximum of 47%. Tax rates are somewhat lower for income from interest, dividends, and annuities.
The average effective income tax rate paid by Spanish residents is 21.1%. This compares to 37.7% in Germany, 22.6% in the United States, and 10.2% in Mexico.
A number of exemptions and deductions are available, including personal exemptions, exemptions for children, and special exemptions for those over age 65… with even more if you’re over 75.
Pensions and Social Security paid to American citizens may be double-taxed. In this case, the tax firm Tax Partners (in Castellón) recommends that you use the American Foreign Tax Credit to recover the tax paid to Spain.
Non-tax residents pay tax only on their Spanish-sourced income. The standard rate is 24% for non-tax residents, with a 19% rate for residents of other EU countries.
Rental income is taxed at a rate of 24% of the gross income for non-EU residents. EU residents pay 19% of their net income after expenses.
Non-tax residents may not claim deductions or exemptions.
Spain’s Tax On Potential Rental Income
Spain taxes income that could have been earned on a property in Spain that is not rented and is not your primary residence. It applies to non-tax residents.
I’m not sure whether to cover this as a property tax or an income tax, because it’s defined under Spanish law as an income tax, but it works like a property tax based on your property’s municipal (assessed) value.
The tax falls under the Impuesto Renta No Residentes, or IRNR (non-resident rental income tax). And the tax is applied to the property’s rendimiento mínimo potencial (minimum earnings potential).
In other words, Spain is making up for the income tax they lose when you don’t rent your property.
The potential income is calculated by multiplying your property’s municipal value by 1.1% (or 2% if the property has not been reassessed in the past 10 years).
Then Spain taxes that potential income at a rate of 24% (19% for EU residents).
So for each 100,000 euros of municipal value, you have:
· Potential income of 1.1%: 1,100 euros,
· Tax owed at 24%: 264 euros (209 euros for EU residents).
At 264 euros per 100,000 euros of municipal value, I’d think of this as another property tax.
Property Tax
Property taxes are assessed by (and paid to) the local municipality, so rates and exclusions will vary.
Property tax is called Impuesto sobre Bienes Inmuebles or IBI, and it’s based on the assessed value of the property… also called municipal value or cadastral value.
As a general guideline, the rate should fall between 0.4% and 1.1% of the assessed value of an urban property.
Rural properties are between 0.3% and 0.9%. The actual number will be up to the municipality.
Capital Gains Tax
- For non-tax residents, the national capital gains tax is applied at a rate of 19% based on the net gain after expenses.
- For tax residents, the national capital gains rate is graduated, from 19% to 26%, also on the net gain.
As was once the case in the United States, the capital gains tax on the sale of your residence may be deferred if you buy another property that is also your residence.
Also, sellers over 65 years old do not have to pay capital gains tax on their residence, provided they lived there for three years or more.
A Plusvalía Tax (capital gains tax) will also be collected by the local municipality at the time of sale. This is generally based on the change in the property’s municipal value between the time of purchase and sale.
There are two calculation methods to pick from as of 2022, one of which will result in a lower Plusvalía Tax bill.
3 Tips To Minimize Your Tax Burden
1. Try to remain a non-tax resident if you’re not in Spain full-time. If you avoid tax residency as a retired expat, your move to Spain could be tax neutral, depending on which U.S. state you’re coming from.
2. Consult with a tax expert on Spanish taxes before you take up residence or buy a property. They’ll give you advice on how to reduce your tax burden, or at the very least tell you what to expect. This applies mostly to Americans, who, unlike other citizens, still have to pay taxes in the United States after they move abroad.
3. Prepare to restructure how you’re holding some of your assets—both in Spain and back home—in order to minimize your exposure to wealth and inheritance taxes. Again, a tax expert’s help will be invaluable.Sincerely,
Lee Harrison
Contributor, Global Property Advisor
Editor’s Note: There’s a lot to consider when it comes to making a lifestyle or investment play in Spain…
For access to Spanish tax experts who can help you make sense of Spain’s various tax regimes and give you practical advice tailored to your specific situation, join us for the Live And Invest In Spain Conference, Nov. 15–17.
The event is designed to help you decide if Spain could be the place for you and to give you the knowledge, support, and contacts necessary to make a move here with confidence.
