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Spain: Living There - Tax Issues

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Living There

INDIVIDUAL TAXATION

Residents are subject to tax on their worldwide income and assets. Resident couples may file their income tax returns jointly or separately.

For married couples married under the community property regime, their incomes, capital gains, and related deductions would be divided equally between them, whether they file jointly or separately. For married couples married under the separate property regime, their incomes, capital gains, and related deductions would be attributed exclusively to each individual earning the income.

INCOME TAX

Income is aggregated and taxed at progressive rates.

Rental Income Tax

Income from properties is categorized as investment income in the Spanish tax laws. Resident individuals earning rental income are taxed at 15%, withheld by the tenant.

When resident individuals file their income tax returns, they can deduct income-generating expenses from the gross rent. The taxable income will then be taxed at progressive rates. Deductible expenses are maintenance and repair (except improvement expenses), mortgage interest and any other financial expense relating to the purchase or improvement of the property (up to the gross rent), local taxes and charges, the outstanding balance of any unsubstantiated doubtful debts, insurance premium, general debts; and annual depreciation allowance (3% of cost of property).

As of 01 January 2007, lettings to young individuals between 18 and 35 years of age are tax-exempt. If the tenants are not in this age bracket, the property owner will only have to declare 50% of the income.

Imputed Income Tax

Imputed income tax is generally levied at 2% on all properties owned by a resident taxpayer. The taxpayer’s primary residence in Spain is exempted from this tax. The taxpayer’s properties located abroad are liable to the imputed income tax. No deductions are allowed but resident foreigners are entitled to foreign tax credits).

Local Income Tax/Income Tax Surcharge

Residents must pay an annual registration fee to the Chamber of Commerce, Industry and Navigation. The surcharge is levied at progressive rates from 0.75% (for income up to €60,101.21) to 0.01% (for income over €24,040,484.18). The surcharge is deductible for income tax purposes.

Net Wealth Tax (Impuesto Extraordinario sobre el Patrimonio)

With regard to the net wealth tax, the residents are subject to the net wealth tax with respect to their worldwide assets (they must file a tax return whenever: their taxable base exceeds €108,182; or their assets are valued at more than €601,012).

Their assessable base (amount on which the tax is levied) is their taxable base less their personal allowances. They are entitled to a deduction of €216,364 (€108,182 for individuals) from their assessable base. They may also deduct €300,506 (€150,253 for individuals) on their primary residence.

The residents’ income tax and net wealth tax liability may not exceed 60% of their total taxable income. If it exceeds the 60% limit, they may reduce their net wealth tax liability by the excess amount to a maximum reduction of 80% of the net wealth tax liability).

CAPITAL GAINS TAX

Capital Gains Tax (Impuesto de Plusvalia)

Residents are liable to capital gains tax when they sell their properties. They may offset their short-term capital gains and losses against each other (excess losses may be carried forward for four years) and long-term capital gains and losses against each other.

Residents may rollover the gain into a new home. They are exempt from the capital gains tax provided that the entire proceeds from the sale of the old dwelling is reinvested in the acquisition of a new dwelling within two years from the date of sale.

The capital gains derived by residents (who have lived in their primary residence for more than three years) who are 65 years of age or older upon the transfer are exempt from tax.

The capital gain or loss on property sale is computed as, transfer price less acquisition cost (acquisition price and related expenses) and less appropriate minimum depreciation. The acquisition cost is indexed by applying a coefficient published annually by the Budgetary Laws, based on the year of acquisition. On the other hand, the capital gain or loss on a property which was transferred as a gift or as an inheritance is computed as, transfer price less acquisition price.

Allowances, Deductions, and Credits

Residents are entitled to personal allowances, several deductions and tax credits.

Family allowance is granted if the child is:

1. single;
2. younger than 25;
3. living with the taxpayer; and
4. its annual income does not exceed €8,000.

If the parents file separate tax returns, each parent deducts 50% of the abovementioned amounts. If the dependent is obliged to file or files an income tax return; the family allowance is not granted.

Elderly relatives living with the taxpayer who are earning less than €8,000 annually are entitled to the following allowances: €900 for those over 65 years of age and €1,100 for those over 75 years of age.

Aside from personal allowances, residents are also entitled to investment credits for non-entrepreneurs. If the dwelling is acquired after 04 May 1998 and no external borrowing was made for the purchase or restoration of the residents’ primary dwelling; residents are entitled to a tax credit of 15% of the costs (up to €9,015) incurred for the purchase or restoration of their primary residence for that year.

PROPERTY TAX

Annual Real Estate Tax (Impuesto sobre Bienes Inmuebles, IBI)

The taxable base is the cadastral value, which is adjusted every eight years with respect to the property’s market value. The tax rates may be increased by the municipal authorities but they are generally 0.4% for urban and 0.3% for rural properties. Property owners are generally liable to this tax but it may be charged to the tenant, if so agreed in the contract, and this is commonly done.

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