The Spanish government is proposing to implement major tax reforms that will affect the tax efficiency of providing employee benefits to Spanish employees. The changes are due to come into effect on 1 January 2015 but some will have retrospective effect.

The key proposals, which are subject to change as the legislation passes through Parliament, include:

  • Employees will be fully taxed on free shares distributed to them by their employer – the current annual tax exemption for up to €12,000 worth of shares will be removed.
  • The reduction for multi-year or irregular income will reduce from 40% to 30% and will only apply to income that is recognized in a single tax period, within the general limit of €300,000. Other changes to this reduction are proposed, such as the elimination of any reference to the specific limits applicable to cases where the income arises from stock options held by an employee.
  • For stock options granted before 1 January 2015, a transitional regime is proposed for salary income arising on exercise of the options.
  • A new savings instrument is proposed which will benefit from a tax exemption on income generated on amounts deposited in an individual long-term savings account or in a long-term individual life insurance policy provided that the taxpayer does not withdraw the capital in the plan for at least five years. Contributions must be at least 85% guaranteed by the financial institution and cannot exceed €5,000 a year during a period of at least five years. 
  • The non-taxable amount of contributions to pension plans and similar systems will be reduced from €10,000 to €8,000. The higher limited of €12,500 for taxpayers over the age of 50 will be eliminated.
  • A cap of €180,000 will be introduced on the level of tax exempt severance payments, reduced by 30% if it is paid in instalments. Currently, compensation received on dismissal is fully exempt provided it does not exceed the limits provided under employment law.
  • Income tax rates will reduce to a marginal rate between 19% and 45% (for 2015, between 20% and 47%) – currently the rates are between 24.75% and 52% (regional income tax is also payable). Savings tax rates will reduce to 19% up to €6,000; 21% from €6,000 to €50,000 and 23% from €50,000 and above (for 2015 the rates are 20%, 22% and 24%, respectively) – currently tax rates range up to 27%.

The reductions in tax rates are welcome but the other changes to the taxation of employee benefits mean that businesses operating in Spain should consider the impact on the stock options and other benefits that they provide to their Spanish employees.

Wider tax reforms are proposed affecting the taxation of companies and VAT as well as the special tax regime that applies to the Canary Islands. Keen readers may wish to read the various Bills (in Spanish): Personal Income Tax and Non-Resident Income Tax; Corporate Income Tax; and Value Added Tax and other Taxes.