Considering that, every second customer asks about Spain, I decided to explore the topic in the article – what to do to feel the freedom, gain impetus, but to do it wisely in terms of law and taxation. It seems that, this is not possible. Spain currently offers a program for people who want to move there. A program under which a significant tax exemption for foreign income is being offered, provided that everything is done properly, of course, and in the right order.
Spanish tax system
The Spanish personal income tax system is officially composed of two income taxes. The first category of income tax is the IRPF (Impuesto de Renta sobre las Personas Fisicas) and is applied to persons who have their tax residence in Spain. The second category of income tax is the Spanish income tax applying to non-resident income (NRIT). For EU residents, this tax is charged at a rate of 19% and shall include the following income earned in Spain:
- Capital gains arising from the disposal of assets;
- Interest on investments and dividends (you may benefit from a reduction in the case of double taxation agreements). EU citizens are exempt from interest tax;
- Income from real property held in Spain;
- Licence fees are taxed at a rate of 24%.
In other words, people who receive income in Spain are required to pay Spanish PIT at statutory progressive rates or NRIT. Non-residents, on the other hand, are liable to pay NRIT tax only on income received in Spain.
NRIT tax is interesting for us, but slightly modified in accordance with a special regime, which allows for the non-payment of taxes on income from other sources than employment.
How does the NRIT tax work in Spain?
In Spain a little-known Royal Decree 687/2005 applies, which amends the provisions of the Income Tax Act in such a way that foreigners who move to Spain and are employed there will be exempted from the obligation to pay tax on income earned outside its borders. This decree is called the Beckham Law because it enabled David Beckham to relate his work for Real Madrid with a tax residence change. He was the first sports star who benefited from this special tax regime in Spain. What is it all about?
In 2005 the Beckham Law changed the existing tax law for foreigners in terms of paying taxes. Individuals, who acquire a tax residence in Spain, will be able to take advantage of a relief entitling them to the exemption of tax on income earned outside Spain. You can obtain such relief within 6 months after relocation to Spain, unless you have been a resident of Spain for the last 10 years. You may benefit from this relief in the year of relocation and within the next 5 years (i.e. 6 years in total).
This means that income earned only within the territory of Spain is subject to taxation, with all labour income earned by a taxpayer from the date of his/her arrival in Spain until the date of notification of his/her departure.
The applicable tax rate on income earned within the territory of Spain for individuals benefiting from the Beckham Law in 2021 is 24% on the first EUR 600,000 earned. Each subsequent earned euro will be taxed at the rate of 47%. A tax on other income earned in Spain has now been introduced. Income obtained outside Spain is subject to exemption.
What to do to take advantage of the Beckham Law?
First of all, you have to move to Spain to work there.
The company that employs you does not have to be a Spanish company, but it must be registered as an employer and conduct business in a permanent office in Spain.
If you hold shares in the company that employs you, it is important not to hold more than 25% of those shares.
You must submit an application for the Beckham Law within 6 months of moving to/taking up job in Spain.
The Beckham Law application process
In order to apply for the Beckham Law you need to follow these steps:
- First of all, an application for registration in Spanish Taxpayers Base in the Spanish Tax Agency should be submitted.
- After receiving the consent for registration in the Spanish taxpayers’ registry, an application for a relief under the Beckham Law – form 149 – should be submitted.
- Depending on the local authority in Spain, other additional documents may be required at the same time. The most commonly required documents include: social security number, signed copy of the contract of employment.
- In the case of individuals who are employed, the obtained certificate should be submitted to their employer.
Note! What happens when you’re not planning to move to Spain, but you have already bought a house there?
An individual who resides in Spain for less than 6 months a year shall pay income tax in Spain. If such an individual owns a real property (whether it is rented or not), he/she is obliged to file a tax return and pay property tax.
If you own real property in Spain, where you live on 1 January in a particular tax year, you have to be aware of the obligation to pay tax. The basis for calculating the tax is the lease value multiplied by the multiplier determined by the local tax office (it varies depending on the region). The tax applies to both residents and non-residents. However, non-residents also pay tax on potential rental income.
How to settle real property tax in Spain?
Not all income is taxable. There is a full list of expenses that can be deducted from earned or presumed income, e.g.:
- Interests on mortgages for the purchase or renovation of the real property.
- Expenses related to the purchase of real property, e.g. transfer tax
and legal fees.
- Non-domestic taxes, e.g. local authorities’ rates (IBI).
- Maintenance and repair costs.
- Community fees.
- Payments from the insurance policy.
- Utility charges, if paid by lessor.
- Marketing costs.
Property Tax (Wealth Tax)
Property tax in Spain is payable from assets held on 31 December of each year. If the assets exceed EUR 10 million, the tax is up to 3.5%. Assets worth EUR 700,000 are exempt from tax, an additional exemption of EUR 300,000 is granted in the case of the real property serving as the main place of residence.
So is it worth moving to Spain? Probably not because of taxes. But if you feel like it, it’s worth to seize the opportunity. Perhaps from the point of view of Spanish law it is easier to arrange your assets than from the point of view of Polish law, which involves CFC and EXIT TAX. Is it difficult? Yes, it is. Any change of residence is difficult and requires thorough preparation.Will this change, that is, can Spain change the tax system? Of course, it can. If Dubai is currently introducing a corporate income tax and announcing the introduction of a private income tax, it can be concluded that it is very likely that things can change in Spain as well. At present, we have the opportunity to reside there for 6 years.