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Spanish income tax for expatriates

The key things expatriates need to know about becoming a tax payers in Spain. If you spend more than 183 days in Spain during the tax year (calendar year) you will become a Spanish tax resident, whether or not you take out a formal residence permit. By Blevins Franks.

Do you need to pay income tax in Spain? Well, if you spend more than 183 days in Spain during the tax year (calendar year) you will become a Spanish tax resident liable for Spanish income tax, whether or not you take out a formal residence permit. The days do not have to be consecutive. You will also be Spanish tax resident if your “centre of vital interests” is in Spain i.e. it is where most of your personal, financial and economic interests lie, or if your spouse lives there for more than 183 days each year. There is no split year treatment; you are either resident or not resident for the whole tax year (unless resident elsewhere for part of a year under the terms of a tax treaty).

Income tax in Spain

As a Spanish tax resident you will be liable to pay Spanish tax on your worldwide income which includes your UK state retirement and other pensions and interest earned on deposit accounts in the UK or offshore.

If you live in the UK and so are not a Spanish tax resident, you will be liable to Spanish tax only on your Spanish income and gains etc.

Rental income worldwide is taxable in Spain for a Spanish tax resident, but only 50% of the net rental income is taxable. The net rental income is the amount of rent due after deducting the usual day-to-day running costs for the period in question including local taxes, repairs and maintenance, managing agents’ fees and commissions, interest on loans for purchase or improvements and depreciation of 3% a year of the cost of the property excluding land value. Deductible items do not include improvements that add further value to the property rather than just restoring it to its former state.

A Spanish non-tax resident is liable to tax on Spanish rental income at the fixed rate of 25% on the gross income and no deductions are allowed.

Where practical the tenant is obliged to withhold 15% of the rent for a Spanish tax resident and 25% for a Spanish non-tax resident and pay it to the Spanish tax authority, the Hacienda.

There is also a notional tax levied on deemed rental income on property that is not your main home or not rented out. It is normally based on 2% of the official value (valor catastral). This rate drops to 1.1 per cent of the valor catastral if this has been revised since 1994. Where such a property is only let for part of the year, the notional income is calculated for the part of the year that the property is unlet. The notional income is added to your other income and taxed at the appropriate rate (or a flat 25% for a non-resident).

If you live in Spain, or if you own a property even as a non-resident, you need a número de identificación extranjero (NIE). Most significant property transactions require you to provide this fiscal identification number. The number identifies you to the Spanish taxman and is required when you pay your taxes or have any dealings with the Hacienda.

Spanish income tax bands for 2006 income range from 15% to 45% (now out of date):

Returns for 2006 income (1st January to 31st December) have to be submitted in May/June 2007.

The state tax varies in Basque Country and Navarra and in certain others.

As a taxpayer in Spain you can complete an individual return or a joint return with your spouse. But you would only do a joint return if one of you had income of less than the personal allowance (€3,400 each; plus €800 if 65 or more and €1,000 if 75 or more).

You do not have to complete a Spanish tax return if:

  • Your income is from one source only, it is earned income (which includes pensions), it is less than €22,000 a year and tax has been deducted at source in Spain. Your UK pension does not comply as there is no Spanish withholding tax on it.
  • Where your income is from more than one source, or where there is no withholding tax at source, and it is no more than €8,000 in the year you will not have to fill in a Spanish tax return. So if your UK pension is less than €8,000 and this is your only income, it means you do not have to complete a tax return.
  • Your income of both investment income and capital gains is no more than €1,600 gross in the year, but subject to withholding tax at source.
  • Imputed rental income is no more than €1,000 per year.
  • If your total income from all sources is less than €1,000.

Note that these limits are for per tax return. If you decide on a joint return, the same limits apply (there’s no increase in the limit).

If as a Spanish tax resident you want to claim any tax relief, you will have to file a tax return. For example, you are entitled to a Spanish tax break if you have a mortgage or a special Spanish tax-qualified savings account to buy a house. You are also entitled to UK/Spanish double taxation relief if you have income taxed at source in the UK or for payments into a pension fund or similar scheme. For a Spanish non-tax resident the UK/Spanish double tax treaty means that any tax paid in Spain can be offset against any tax due in the UK.

Unless your financial affairs are very simple it would be advisable to seek the advice of an accountant or tax adviser with comprehensive and up to date knowledge of both the UK and Spanish tax rules. You may be able to use legitimate structures like an offshore insurance bond or an offshore trust to reduce your tax liability significantly. A little time and effort now taking expert advice could reap some financial reward, and minimise your Spanish income tax.

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