Tax

Residence and domicile

How does an individual become taxable in your jurisdiction?

An individual is liable to tax in Spain whenever he or she is considered a tax resident in Spain and whenever he or she, not being resident in Spain, obtains Spanish source income.

Residents

The Spanish Personal Income Tax Act sets out two rules and a presumption to consider an individual as tax resident in Spain.

The permanence test applies when the individual remains for more than 183 days per calendar year in Spain. Occasional absences are considered when calculating the period of residence, except when individuals can prove they have their tax residence in another country. In other words, to determine the period spent in Spanish territory, sporadic absences would be computed as time spent in Spain unless the individual can prove his or her tax residence in other country. With regard to countries or territories classified as tax havens according to Spanish legislation, the Spanish tax authorities may request proof of residence in the tax haven for 183 days per calendar year.

The centre of economic interest test applies when the main or central place of business of the individual is directly or indirectly located in Spain.

Finally, unless there is evidence to the contrary, an individual shall be deemed to be a resident of Spain if, in accordance with the aforementioned criteria, his or her legally non-separated spouse and dependent minor reside in Spain (presumption applicable).

The main direct taxes to individuals with tax residence in Spain are personal income tax, wealth tax and inheritance and gift tax.

Personal income tax is applicable to an individual’s worldwide income, which includes employment income, salary as a member of a board of directors, dividends, capital gains, interests and rental income. The Spanish Personal Income Tax Act applies and, depending on the personal and family status of an individual, allowances may be given.

In Spain, wealth tax subjects an individual’s worldwide net assets (minus liabilities) to taxation. However, the Wealth Tax Act provides for an exemption of €300,000 for permanent domicile and €700,000 on net assets. However, wealth tax is partially transferred to the autonomous regions of Spain, which have the right to regulate exemptions and tax rates (ie, exemption on family business). As a consequence, the final rate of wealth tax may vary depending on the autonomous region where the individual is tax resident.

Inheritance and gift tax is also partially transferred to the autonomous regions of Spain and the final tax rate substantially changes depending on the tax residence of the individual and the beneficiaries.

Non-residents

Non-residents income tax (NRIT) applies to Spanish source income and capital gains obtained by individuals who are not considered residents in Spain according to the above criteria. Spanish source income and capital gains include:

  • income obtained through a permanent establishment (PE);
  • income obtained without a PE but derived from economic activities, services or other activities carried out in Spain;
  • labour income that derives, directly or indirectly, from a personal activity carried out in Spain;
  • interest and royalties;
  • dividends;
  • income derived from real estate located in Spain; and
  • capital gains.

In addition to NRIT, non-residents in Spain are subject to wealth tax on their assets and rights that are located, can be exercised or must be complied with in Spain, considering a €700,000 exemption.

Inheritance and gift tax is also applicable to non-residents in Spain for the acquisition of goods and rights that are located, can be exercised or must be complied with in Spain, as well as for the receipt of amounts derived from life insurance contracts when the contract has been formalised with Spanish insurance companies or has been formalised in Spain with foreign insurance companies, with some particularities.

Income

What, if any, taxes apply to an individual’s income?

Residents

Spanish personal income tax allocates some income to the savings tax base and some to the general tax base. The main difference is the tax rates: 19, 21 and 23 per cent for the savings tax base, while progressive tax rates are limited to 48 per cent for the general tax base.

Dividends, interests and capital gains will generally be allocated to the savings tax base. Employment income, business activities as an individual, rental income and deemed income will be allocated to the general tax base.

Non-residents

Generally, non-resident income tax will apply to dividends, interest and capital gains at a rate of 19 per cent and to any other sort of income at a rate of 24 per cent (eg, employment income, deemed income and rental income). If the non-resident resides in the European Union, 19 per cent withholding tax will also apply to rental income and deemed income.

Capital gains

What, if any, taxes apply to an individual’s capital gains?

Tax-resident individuals will be subject to personal income tax on capital gains at 19 per cent for the first €6,000, 21 per cent for up to €50,000 and 23 per cent for over €50,000. Non-resident individuals will be subject to non-resident income tax at 19 per cent. Additionally, under certain specific circumstances, capital gains can be taxed according to the general tax base.

For both resident and non-resident individuals, capital gains will be assessed on the difference between the market value of the asset transferred and its acquisition cost. Depending on the asset being transferred, the market value and the acquisition cost will be adjusted for taxes and expenses incurred by the transferor.

Lifetime gifts

What, if any, taxes apply if an individual makes lifetime gifts?

Lifetime gifts will be subject to inheritance and gift tax and, under certain circumstances, to personal income tax at the donor level on the difference between the market value of the gift and its acquisition cost.

The beneficiary of a lifetime gift will be subject to inheritance and gift tax in accordance with the taxation of the autonomous region of his or her residence (which generally rises up to approximately 34 per cent for lifetime gifts equal to or greater than approximately €779,000). However, these tax rates can be reduced depending on the autonomous region. For instance, in Catalonia, lifetime gifts can be taxed at 5, 7 or 9 per cent if they are formalised in a public deed and are gifted between descendants. In other autonomous regions, such as Madrid, gifts may effectively be exempt.

If the beneficiary of the lifetime gift is not tax-resident in Spain, the state legislation will apply, which foresees tax rates of up to 34 per cent. If the beneficiary is tax-resident in the EU or the EEA, the taxpayer will be entitled to apply the state or the autonomous region’s legislation. Nevertheless, the Spanish Supreme Court pronounced in favour of allowing non-residents in the EU or the EEA to apply autonomous regions’ legislation.

Notwithstanding the above, if the lifetime gift is a property, the legislation of the autonomous region where the asset is located will apply. Under certain circumstances, if the property is donated to constitute the permanent domicile of the beneficiary, exemptions would apply.

The donor will include any capital gains derived from the difference between the market value of the gift and its acquisition cost in his or her personal income tax. Cash donations are not subject to personal income tax.

Inheritance

What, if any, taxes apply to an individual’s transfers on death and to his or her estate following death?

As a general rule, inheritances will be subject to inheritance and gift tax. This tax is regulated by the state legislation. However, autonomous regions have the right to legislate in terms of exemptions, allowances and tax rates. Consequently, inheritance and gift tax may substantially differ depending on the autonomous region.

Residents

An autonomous region’s legislation regarding the residence of the deceased will apply. If the autonomous region has not legislated in this regard, tax rates usually range from 7.65 per cent to 34 per cent for inheritances equal to or greater than €797,555. If the deceased was tax-resident in Spain but the beneficiaries are tax resident in the EU or the EEA, they would have the right to choose between the state legislation or the autonomous region’s legislation. If the beneficiary is not tax-resident in Spain, the EU or the EEA, the state legislation will apply.

Certain exemptions and allowances will apply on succession as explained below.

Real property

What, if any, taxes apply to an individual’s real property?

Direct ownership of a property in Spain by an individual involves payment of the following taxes:

  • wealth tax with an exemption of €300,000 (permanent domicile), plus up to €700,000 exemption as a general allowance;
  • real estate tax;
  • personal income tax on the deemed income for the mere ownership of the property;
  • rental income; and
  • other minor local taxes.
Non-cash assets

What, if any, taxes apply on the import or export, for personal use and enjoyment, of assets other than cash by an individual to your jurisdiction?

Taxes will differ depending on the asset because the Spanish tax system has special taxes for boats, cars and paintings, among others. In addition, value-added tax (VAT) may also apply to the transfer of ownership of such assets at a 21 per cent general tax rate (lower rates may apply depending on the asset).

Other taxes

What, if any, other taxes may be particularly relevant to an individual?

For an individual who plans to invest in Spain, the most relevant taxes would be those related to real estate investments. For example, if an individual acquires a residential property, VAT (10 per cent) would apply if the property is brand new, and transfer tax would apply if the property is not brand new. In this regard, transfer tax is partially regulated by the autonomous regions (tax rates range from 6 per cent to 11 per cent).

Trusts and other holding vehicles

What, if any, taxes apply to trusts or other asset-holding vehicles in your jurisdiction, and how are such taxes imposed?

Trusts are not recognised under Spanish law.

In Spain, it is very common to set up Spanish holding companies to invest in different companies, real estate or other investments. In this regard, investing or holding assets through a holding company allows for the application of two different tax allowances if certain requirements are met, namely:

  • Spanish holding tax: there is a participation exemption on dividends and capital gains if certain requirements are met (holding at least 5 per cent of the subsidiary, one-year holding or maintenance period, among others); and
  • 95 per cent or 100 per cent family business allowance: if certain requirements are met, the mere ownership and transfer of shares of a holding company (or any Spanish company) will benefit from a 95 per cent tax allowance on inheritance and gift tax and a 100 per cent allowance on wealth tax.
Charities

How are charities taxed in your jurisdiction?

In Spain, charities may be organised under different legal forms, the most common being associations and foundations. Both types of charities pursue a general interest and are based on non-profit principles. These entities will be subject to a 10 per cent corporate income tax rate, but income derived from their donors or from assets will be tax-exempt if certain requirements are met.

Anti-avoidance and anti-abuse provisions

What anti-avoidance and anti-abuse tax provisions apply in the context of private client wealth management?

Spanish general tax law has a general anti-abuse rule that applies to all Spanish taxes whenever a taxable event is totally or partially avoided or the tax due is reduced as a consequence of the taxpayer: (i) carrying out a notoriously artificial or unsuitable act or business for the achievement of this result; or (ii) establishing an act or a business that does not result in significant legal or economic effects other than saving tax.

Additionally, the Spanish Personal Income Tax Act and the Corporate Income Tax Act establish controlling foreign corporation (CFC) rules, which apply to non-resident subsidiaries of Spanish taxpayers that do not have human and material resources, and:

  • hold more than 50 per cent of the capital of the foreign company; and
  • for which the corresponding personal or corporate income tax is less than 75 per cent of the tax that would have been due in accordance with Spanish rules.

Only certain income is considered in the application of the CFC rules, such as income from assurance activities and real estate that is not considered as a business activity.

The Personal Income Tax Act provides for an exit tax on unrealised capital gains from a Spanish tax resident arising from a change in his or her tax residence if he or she has been a Spanish tax resident for at least 10 of the 15 years preceding his or her change of residence, and if the market value of his or her shares exceeds €4 million, or €1 million if holding more than 25 per cent of the shares. If the individual moves to an EU country or a country with an effective exchange of tax information, exit tax will only be required if within 10 years the individual transfers his or her shares, changes his or her tax residency out of the EU or violates the obligations of information exchange.

Finally, Spanish legislation provides for anti-avoidance rules applicable to tax havens.