Regular legal-contributor Raymundo Larraín Nesbitt tells us about a relatively new tax scheme the Spanish Treasury quietly introduced last year that works similarly to the UK’s popular non-dom tax arrangement, and which could make Spain a more attractive destination for wealthy expats when word of this pilot scheme gets around.
By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of July 2016
The Spanish Tax Office quietly, albeit boldly, introduced a tax scheme last year inspired by the popular UK’s non-domiciled tax regime which has proven most successful at attracting foreign investments (particularly in the Greater London area). It is a lukewarm attempt to attract high-achievers and create wealth fostering job creation.
Surprisingly, this pilot initiative has flown under the radar as I do not recall having read a single article published on the matter. I believe it merits exposure and should be made known to our large expat community as the savings on taxes are quite significant for the privileged few who are lucky enough to qualify.
Right off the bat I should make it clear that the criteria to benefit from it is fairly restrictive and it is geared at high-earning individuals who plan to relocate to Spain for professional reasons. Which means that most expats will not qualify.
Without further ado I analyse succinctly what it consists on and how to benefit from it. I will structure it as a FAQ for ease of comprehension.
Who is it aimed at?
This law is tailored to cater for senior corporate individuals (think of a multinational relocating a top executive in Spain). These overqualified individuals are the ones that will reap the tax benefits of the generous provisions set out by this law. But other cases, such as high-profile artists, are also included.
Professional athletes, such as football players, are barred from making use of it.
The Tax Benefits
In a nutshell, this tax scheme allows expat taxpayers to make spectacular savings on paying Income Tax in Spain. If you opt into this scheme you stand to benefit from both income derived in Spain as well as any other worldwide income.
- Spanish Income. Unlike in the UK, where you negotiate with the HRMC to pay a fixed annual sum, in Spain the first €600,000 earned from a source within Spanish territory will be taxed at a flat rate of 24%. The remainder will be taxed at 45%. Under normal circumstances resident taxpayers in Spain pay 45% on earnings of €60,000 or above. As can be surmised, even for earnings whose source is in Spanish territory the tax savings are huge.
- Worldwide Income. But it is here where this tax scheme truly shines. Spanish Tax Authorities will only tax you on your income derived within Spanish territory. Any other source of worldwide income is tax-exempt (just like with the popular UK’s non-dom tax scheme). Under normal circumstances, resident taxpayers in Spain should pay for their worldwide income. Moreover, other countries cannot tax you on your worldwide income as for all intents and purposes you have opted to become a Spanish tax resident. You can claim double-taxation relief which negates other countries’ claims. This advantage offers a hugely attractive prospect for those that hold substantial overseas earnings and interests.
- On opting for the scheme, expats will be treated as if they were resident taxpayers but in reality it will be a legal fiction whereby they will benefit as if they were still non-resident taxpayers. So you in fact get the best from both worlds.
- It applies on the fiscal year of relocation as well as on the following five years (total up to six years).
Who can apply?
- Expats relocating to Spain as a result of a professional contract. The contract is a sine qua non requirement to opt into this scheme.
- Not to have resided in Spain within the previous 10 years.
- No earnings derived from a Permanent Establishment in Spain.
When does it apply?
It is time-limited and applies on the fiscal year of relocation as well as on the following five years (up to six years).
Timeline to apply?
Six months as from the start of the economic activity or as from enrolling in Spain´s Social Security (equivalent to the UKs NHS).
Fall from Grace
Unfortunately, this initiative falls short from its UK counterpart for a number of reasons. What keeps it from being great in my mind is the fact that the Tax Office requires that the relocation comes as a result of a job offer. This leaves out entrepreneurs which are hands down the greatest source of wealth and job creation through their drive and ingenuity. This, coupled with the fact that it is time-limited, and that the tax is not capped for income derived in Spain holds it back in my opinion from being stellar.
The Spanish Tax Office should be heartily congratulated on offering such tax incentives to high-achievers. This type of tax scheme attracts talented individuals, fostering wealth and jobs at a time where it is much needed in Spain.
It is most certainly a step in the right direction and I for one hope the AEAT continues to venture down this road. Kudos to them.
If you plan to relocate to Spain as a result of a work commitment and happen to earn a substantial amount you may want to look into this tax scheme. Unless you enjoy overpaying taxes that is; bless your heart.
“If you fail to plan, you plan to fail.” – Benjamin Franklin.
Founding Father of the United States. Exceptionally gifted scientist, inventor, diplomat, writer, printer, postmaster and political theorist. Even politician in his spare time; nobody’s perfect.
Spanish Wealth Tax (Patrimonio) – 8th November 2011
Taxes on Selling Spanish Property – 8th December 2014
Changes to Spain’s Inheritance and Gift Tax Law – 21st February 2015
La Complementaria or ‘Bargain-Hunter Tax’ – 8th May 2015
Taxes on Buying Spanish Property – 8th July 2015
Non-Resident Taxes in Spain – 8th December 2015
Spanish Inheritance Tax (Part I) – 8th February 2016
Spanish Inheritance Tax (Part II) – 8th March 2016
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2016 © Raymundo Larraín Nesbitt. All rights reserved.