Tax in Spain: Everything Expats Need to Know

The Spanish tax system is notoriously complex. This isn't helped by the fact that tax in Spain is administered not only by the central Tax Agency (Hacienda) but also by the regional governments, of which there are 17.

As in other countries, the taxes that you will have to deal with will depend on your status in the country - are you tax resident in Spain?

It will also depend on your activity in Spain: are you working in Spain? If so, are you an employee or self-employed? How much do you earn and what industry are you in? Are you buying a house in Spain?

There is a long list of categories and scenarios, though as we are writing this guide from the point of view of expats who visit or live in Spain, we shall focus on property taxes, (as well as those taxes related to property, such as rental income tax, wealth tax, inheritance and gift tax and capital gains tax) and also Spanish income tax, since these are arguably the most common taxes that expats need to deal with.

The first and most important issue to determine at the outset is whether you are tax resident in Spain. This will impact on your liability to pay tax in Spain, the amount of tax you must pay and whether you can access tax deductions, available to Spanish tax residents.

According to Article 9 of the Spanish law 35/2006 relating to tax residency, a person is considered to be tax resident in Spain if they fulfil any of the following 3 conditions:

1. Spend more than 183 days in Spain (Note, residency for at least this period is a condition of many visas issued to live in Spain), 
2. Have the 'nucleus' of one's economic interests in Spain, either directly or indirectly
3. Have a spouse or children reside permanently in Spain

If you are considered to be tax resident in Spain, you are subject to taxation in Spain on your entire worldwide income. As an example, if you are deemed to be tax resident in Spain, upon selling a property in another country, you may have a tax liability for capital gains on any profit generated.

Income Tax (known as IRPF in Spanish) is a progressive tax in Spain, and so you pay higher levels of tax the greater up the income scale you go.

The Spanish central government tax rate is applied to one-half of your income, while the regional tax rate is applied to the other half. The actual amount of tax you will pay will therefore depend on where you live in Spain.

The Spanish Tax Year follows the calendar year, and so runs from January to December each year, unlike in the UK, which operates from April to April.

Anyone with a single income of €22,000 or more must make a tax return (or over €14,000 if your income is from 2 or more sources).

You must submit your tax return by the 30th of June each year - this would include not just your income from employed work or self-employed income, but also any other income you may have from other sources.

Upon submission of your tax return or the 30th of June, by default 60% of any tax due is payable, with the balance payable in November.

The Spanish tax rates on income, as determined by the central government, are as follows:

To the above tax rates, there must be added the regional tax rates. So, for example in Cataluña, the following tax rates apply:

As can be seen, it can be tricky to determine the amount of tax you owe, given the overlapping of income bands. Most people will have a local gestor or accountant deal with their income tax.

Just as half of Spanish income tax is divided between the State and Regional governments, tax exemptions and deductions are similarly divided.

From 2023, no income tax is payable on income up to €15,000, though this does not work as a personal allowance in the UK but is rather a tax exemption targetted at those on minimum income levels. There is a basic personal allowance of €5,500 for those on higher income levels, while this increases to €6,700 for those aged over 65.

There are tax deductions at the State level for those who purchased their home with a mortgage before 2013 equal to 15% of the mortgage repayments.

Those who rent out property where the property is the principal private residence of the tenant may deduct 60% of the income before any tax is payable in Spain.

Certain foreign workers may be able to benefit from the tax rule referred to as the Beckham law, which applies a flat-rate of Spanish income tax equal to 24% on income up to €600,000 for a maximum period of 6 years.

This represents a huge saving in the amount of taxes in spain that are paid as compared to the progressive tax rates applied to most workers. Also, anyone who qualifies under the Beckham rule pay taxes in Spain only on their earnings in Spain, not their worldwide income.

To qualify, the worker must not have been a Spanish resident during the previous 10 years and must pay taxes in Spain ie, be tax-resident in Spain. As stated, tax residency is automatic if the worker is living in Spain more than 183-days per year.

For those availing of the Spain digital nomad visa, the requirement to not have been tax resident in Spain during the prior 10 years reduces to 5 years.

Spanish tax residents who receive a UK pension must, for tax purposes, include this income in the annual income tax returns, as this is a taxable income like any other. This is based on monthly pension income. If you take a lump-sum, different rules apply and specialist financial advice should be sought.

VAT in Spain is known as IVA (Impuesto de Valor Añadido) applies to all purchases made in Spain except for those transactions which are exempt and, as in other countries, there are various rates or bands. In Spain there are in fact three rates:

The Reduced VAT Rate of 10% applies to foodstuffs in general, home purchases, hotel stays, tickets to shows and other forms of entertainment, glasses and contact lenses, public transport and funeral services.

The Super Reduced VAT rate of 4% is applied to bread, milk, eggs, fruit, vegetables, cereals, cheeses, books, newspapers and medicines.

So the reduced rates are typically applied to those products which are considered as vital.

Those who work in Spain - either as employees or self-employed - must pay into the Social Security system, the equivalent to national insurance in the UK.

Just as in the UK and elsewhere, the employer makes a contribution in respect of employees.

The actual amount that is paid depends on which situations the worker wishes to contribute towards e.g. absence due to illness or accidents alone or also for periods of unemployment etc as well as the professional cateogory of the worker e.g. teachers may pay less than high-altitude welders, due to differences in risk levels.

The Self-employed must pay a minimum amount, typically equivalent to around €350 - €400 per month in 2023 (though this amount is reduced in the first 18 months of self-employment).

Once an individual has tax resident status in Spain, they are liable to pay capital gains tax on profits derived from the sale of assets anywhere in the world.

The capital gains tax rates in Spain may be summarised as follows:

The types of assets that are affected by capital gains tax are numerous, including stocks, real estate, and works of art, among others.

It is therefore important to consider your tax residence when timing the sale of a property, for example. Better to do this before you become tax resident in Spain so you can avoid having to pay taxes in Spain.

Exemptions exist where the proceeds are reinvested in the individuals' principle private residence, or indeed where they are aged over 65. For more in depth information, see: capital gains tax in Spain.

Where assets are inherited from a deceased person who was resident in Spain or held assets in Spain though was not resident in Spain, by a beneficiary who is resident or not resident in Spain, an obligation arises to declare the inheritance and potentially pay taxes to the Spanish tax authorities.

Importantly, if one or other or both of the testator/beneficiary do not have Spanish residency, the State level taxation rates and exemptions may be applied. Where possible, it is better to opt for the application of the regional inheritance tax, since there are more generous deductions and exemptions.

In general, both regional and state level inheritance rules permit a reduction - in some cases almost exemption - from inheritance tax when the asset inherited is the primary residence of the deceased, and the beneficiary is the spouse or child of the deceased.

Given the number of variables in terms of where assets are located, where the deceased was resident and where each of the beneficiaries are resident, it can be complex to determine which rules of Spanish Inheritance Tax apply and how much - if any - tax is payable.

Ultimately, it is therefore to be recommended to have a local lawyer manage this for you, since it is necessary to arrange a lot of documentation and the tax should be paid within 6 months to avoid fines being levied.

Gift tax is subject to the same legislation as inheritance and accordingly, inheritance and gift tax are treated together. One difference can be that, in certain situations, both the donor and donee of the gift may be liable for tax.

For expats who are resident in Spain, the same rules are applied as for Spanish nationals. The Spanish tax resident person who receives the gift should make a declaration of the gift in their personal income tax return in April-June of the following year. The tax rates are as follows:

Certain regions have effectively abolished this tax, c.f. Madrid, Andalucia, La Rioja.

If the gift relates to a property, and the value of the property has increases since the time that the donor purchased it, then the donor may also be liable for plusvalia tax. For more information on this tax, see: property tax in Spain.

Where the asset that is gifted is located outside Spain, and both the donor and donee of the gift are tax resident in Spain, care should be taken to avoid double taxation. A double taxation situation could arise where there is a gift tax applicable in the country where the asset is located as well as in Spain.

The fact that tax residents in Spain hold assets in other countries will have been brought to the attention of the Spanish tax authorities due to the legal obligation for those who hold assets abroad (outside Spain) to declare such assets.

It should be noted that tax form 720 does not imply additional taxation (it is an informative form). The deadline is the 31st of March each year. What information must be included in this form?

There are three groups or blocks; you must complete this tax form if you are a Spanish resident with assets outside of Spain worth over 50,000 € within any one group:

• Offshore accounts in financial institutions, with a total balance (sum of all accounts) higher than €50,000, held as an individual being either owner, holder, representative, authorized recipient, beneficiary or proxy holder, …
• Values, Rights (portfolio investments), life or disability insurances and annuity or temporary revenues, deposited, managed or obtained abroad, with a total balance (sum of all assets of the group) higher than €50,000.
• Real estate or rights on real estate located abroad, with total values (sum of all assets of the group) higher than €50,000.

The number of co-owners is irrelevant. If any of the mentioned elements is higher than € 50,000, they must be included in the form.

If you completed the Tax Form 720 in Spain last year and your circumstances have not changed then there is NO need to complete this form again. You should complete this form this year if:

• You are a new resident in Spain and this is your first tax year
• You completed the 720 form on a previous year, but your assets have increased by 20,000€ or more of total assets in any of the groups previously referred to, or that have reached more than 50,000€ in a previously undeclared category in the current year.

Previously, the fines for failure to submit the 720 return or omitting information were egregious with fines starting at €10,000, However, following a European Court ruling, these have been substantially reduced to €300 minimum fine (€600 if the assets are located outside the European Union) up to a maximum of €20,000.

A separate article provides a more extensive analysis of the 720 tax form Spain. 

In 2011, as a result of the financial crisis, the Spanish government reintroduced a wealth tax. It was meant to be temporary, but now in 2023, it is still here and, in fact, has been augmented by a separate wealth tax, aimed at the very wealthiest.

The wealth tax could potentially impact non-residents as well as tax residents in Spain where the value of the property is sufficiently high. The main difference is that, for Spanish tax residents, the calculation of their wealth is made on their worldwide income.

The wealth tax is applied only once a national exemption of €700,000 is applied to each individual. This is calculated per person, so a couple would have to have a combined wealth of over €1.4m in order to be liable to pay wealth tax.

In addition, at the regional level, a further exemption is applied to take into account the value of property. This varies per region and so, in Cataluña there is an exemption of up to €500,000 for their main residence, while in Murcia the exemption is higher, at €700,000.

The wealth tax rates are below. So, after applying the national and regional exemptions, the wealth tax is payable on any remaining income as follows:

A new version of the wealth tax was introduced in 2023 and is applied where the overall (read worldwide) wealth of tax residents is over €3m. The tax rates are as follows:

This new wealth tax will apply only in those regions of Spain where no wealth tax exists, namely: Madrid and, more recently, Andalucia. Our accountants can provide you with assistance managing your wealth tax return in Spain. 

Owners and purchasers of property need to deal with property tax in Spain - whether they are resident in Spain or not.

The Property Transfer Tax (ITP), is payable on the purchase of a resale property and varies across Spain as it is set at regional level. In general, the higher the value of the property, the higher the rate of ITP, though in general this property tax ranges between 8-10%, with higher amounts in Cataluña and the Balearic Islands for properties over €1m.

If the property is new, then the buyer pays VAT (known locally as IVA). This property tax is set at the national level and is 10% currently. One exception is the Canary Islands which is not a part of the Spanish VAT area, and instead IGIC is applied. IGIC tax is usually 7%, though a lower level of 5% is applied to purchases of new properties under €150,000.

In addition to the main property taxes mentioned, you may also be liable for a small amount of stamp duty on any mortgage used to purchase the property. This used to be a more considerable property tax, however the Supreme Court ruled that the Spanish banks are liable to pay this tax, not the purchasers.

Apart from the main property transfer taxes, property owners in Spain must pay a Council Tax annually (known as IBI in Spain) and will also have a separate charge for the management of rubbish.

As many properties are located in urbanisations or multi-occupancy buildings, it is normal to have to pay a Community charge also, to manage maintenance of any communal services such as a porter, an elevator or a swimming pool.

For those buying property in Spain but who are not tax resident in spain, it is necessary to pay income tax related to their property: the non-resident income tax.

Known locally as the IRNR tax, this tax is payable on an 'imputed' rental value of the property, however it is applied when the property is not rented out. Ironically, if the property is rented out, a different tax is payable on any rental income.

Those resident in the European Union, must pay tax at a rate of 19% while non-EU residents must pay tax at 24%. These rates are payable once the 'taxable base' has been calculated. The 'taxable base' is a percentage of the 'catastral value' of the property. The 'catastral value' is a value attributed to the property by the Spanish tax agency. The 'taxable base' amount is set at 2.2% of the 'catastral value' (or 1.1% if the catastral value was re-evaluated in the last 10 years).

Where a property is rented out in Spain, the owner must pay income tax. Non-EU residents again are in the position having to pay Spanish tax at a higher rate than EU residents.

Not only do the Spanish tax rates in this case differ according to the country of residence of the property owner, different, but also the amount of deductions that may be made.

Property owners who rent out property in Spain, and who are tax resident in an EU country may deduct a number of expenses from the rental income, however those who are tax resident in non-EU countries may not. This can represent a considerable difference, since one of the expenses is an amount equal to 3% of the value of the property, for depreciation.

Whether you are a Spanish tax resident or not, you may have capital gains tax obligations on the sale of a property in Spain. This will only be the case if a profit has been generated.

Since the person selling Spanish property may often not be returning to Spain, anyone who purchases a property from a non-resident, must deposit 3% of the value of the property with the Spanish tax agency directly, to cover potential capital gains tax obligations of the seller.

Also worth noting is that if the property being sold is the result of an inheritance, Spanish inheritance tax may be payable.

As can be seen in this brief overview, tax in Spain is a complex matter that depends very much on the circumstances of each individual. It is highly recommended to have a registered and regulated professional to assist you when dealing with these matters, especially since Spain is infamous for levying large fines for any failure to comply with its extensive tax laws.