Taxation of the natural person – income tax in Spain, etc.

Natural persons are subject to Spanish income tax (IRPF, Impuesto sobre la Renta de las Personas Físicas-Income Tax Spain).

The individual autonomous regions levy a wealth tax (IP, Impuesto sobre el Patrimonio).

There is no separate tax on the profit arising from sales, as capital gains are counted as taxable income.

A. Income tax Spain (Impuesto sobre la Renta de las Personas Físicas, IRPF)

I. Tax subject

The manner in which natural persons are subject to taxation depends on whether they are considered to be resident in Spain.

Tax residency is assumed if the natural person has their habitual residence in Spain, i.e. either stays in Spain for more than 183 days in a calendar year (so-called personal residency test) or if the center of their life interests is in Spain, in particular their economic interests , such as employed, commercial or freelance activities, are carried out there (economic residency test).

A married person is considered a resident if the permanent residence of the spouse and their dependent children is in Spain. However, evidence to the contrary is admissible here.

Furthermore, natural persons of Spanish nationality who prove their new residence in a low-tax country or tax haven are still liable to tax in Spain for both the assessment period in which they changed their residence and for the following four assessment periods (Spain exit tax).

It should be noted that, in principle, a natural person is considered a resident for the entire calendar yearNon-resident applies because the change of residence is not viewed as an interruption of the survey period.

The tax residence is proven by a certificate from the relevant tax authorities of the relevant country. The validity period of such a certificate is one year. It should be noted that the existence of a residence permit or an administrative residence permit does not necessarily lead to tax liability, which applies in the opposite case.

In the event of natural persons moving away from Germany and possibly resulting extended limited income tax liability with demonstrably lower (by 1/3) taxation by Spain, departure taxation in Germany is excluded by the German-Spanish double taxation agreement.

In the case of tax residency, the progressive tax rates from the so-called “obligación personal” apply, taking personal circumstances into account. If there is no tax residency and therefore limited tax liability, a certain fixed tax rate according to “obligación real” applies (see below).

Since 2004, under certain conditions, natural persons who become tax residents there as a result of moving their place of residence to Spain have been able to choose, for the assessment period in which the change of place of residence occurs and for the following five years, whether to be tax resident in Spain according to the “Impuesto sobre la Renta de las Personas Físicas” have unlimited tax liability in Spain or want to be taxed with limited tax liability according to the “Impuesto sobre la Renta de no Residentes” (INR, taxation of “non-residents”). These, colloquially “Lex BeckhamHowever, the regulation mentioned requires that you were not resident on Spanish territory for 10 years before moving to Spain, that the move is based on an employment contract, that the work is actually in Spain for a Spanish company, a Spanish corporation or for the permanent establishment of one in Spain non-resident corporation, and that the wages from this employment relationship are not exempt from the “Impuesto sobre la Renta de no Residentes”.

If the taxpayer decides to be taxed according to the “Impuesto sobre la Renta de no Residente”, he is subject to limited wealth tax liability. The purpose of this standard is, in particular, to encourage posted executives with high incomes to invest in Spain.

It should be noted that despite moving your place of residence to Spain and simultaneously giving up your place of residence in Germany (if retained, unlimited tax liability in Germany may have to be checked in individual cases), limited tax liability may arise with regard to German domestic income. These are those that have a specific connection to the country and are expressly mentioned in the law: income from renting and leasing a property in Germany, income from operating a business in Germany, income from self-employment or employment in Germany, income from a domestic business debt relationship. Due to the German-Spanish double taxation agreement, it is possible to offset the German tax against the tax incurred in Spain on the global assets of the person with unlimited tax liability. However, as long as the German income is not subject to tax deduction at source (e.g. wages subject to wage tax deduction), an assessment in Germany is required beforehand.

In this respect and with regard to any further statements that refer to non-residents below, the individual double taxation agreements must be observed.

Regardless of the restrictions from the double taxation agreements (e.g. with regard to the excluded extended limited income tax liability in Germany), taxation by the German tax authorities at the time of departure is always possible under certain conditions(Exit tax). This is a one-off burden, the main area of application of which is the taxation of hidden reserves that are embodied in a qualified participation in a corporation of the person who is still subject to unlimited tax liability at the time of the move. This means that Germany reserves the last opportunity to access the hidden reserves, which would otherwise only be taxed when they are realized in the country of residence. The personal requirement for this exit tax in the narrower sense is that the natural person has been subject to unlimited tax liability in Germany for at least 10 years. From a material point of view, shares held in corporations of at least 1% within the last five years are recorded as private assets. In addition to the taxation reason for the departure, there are four departure surrogates which have the same legal consequences. The legal consequences of all taxation occasions are in turn limited by three exceptions. Exit tax is also triggered if:

• a person who is not subject to unlimited tax liability in Germany acquires shares within the meaning of the provision by way of gratuitous legal succession through an inter vivos gift or acquisition upon death.

• the taxpayer maintains a residence in Germany despite moving away and thus remains subject to unlimited tax liability in Germany, but is primarily considered to be resident in another country under a double taxation agreement.

• The taxpayer separates shares or parts of the shares from his domestic private assets and assigns them to a foreign permanent establishment.

• In other cases in which German taxation law is limited or excluded with regard to the profit from the sale of shares.

The fictitious capital gain is then determined by calculating the difference between the fair value of the shares at the time of departure and the historical acquisition costs. This becomes part of the regular income tax assessment basis unless one of the three exceptions applies:

• If the immediate inclusion of the tax entails considerable hardship for the taxpayer, he or she can apply for a maximum five-year interest-bearing deferral against payment of security. The deferment can be revoked upon sale of the shares or in similar cases. The application requirement and the provision of security for cases of moving to another EC/EEC state are questionable under European law and were recently declared by the ECJ to be contrary to European law.

• If the taxpayer is a German or Spanish citizen (according to the regulations, generally: a citizen of an EC/EEC member state) and, after changing residence from one country to the other, he is subject to an unlimited tax liability that is comparable to that of his home country, then an application-free, Interest-free and immediate deferral possible. However, this can be revoked during implementation processes and is also associated with comprehensive reporting obligations. If the hours are revoked, reductions in value must be taken into account in favor of the taxpayer.

• The tax claim no longer applies retroactively if the taxpayer has returned to Germany within five years of moving to a third country and has not sold the shares in the meantime. An extension of the five-year period by a further five years is possible under certain conditions. The same applies to moving away and withdrawing to an EC/EEC member state (e.g. from Germany to Spain). In this case there is no time limit, but the only thing that matters is that the shares were not sold during the time in another European country, there is no departure surrogate and the unlimited tax liability continues after the withdrawal.

II. Tax object

Residents are subject to unlimited tax liability, i.e. their worldwide income is taxable in Spain, unless a double taxation agreement with another country gives them the right to tax.

Non-residents are subject to limited tax liability on their income from Spanish sources.

Taxable income is divided into income categories depending on their source or origin:

• Income from non-self-employed work

• Income from capital,

• commercial income,

• capital gains,

• Retirement benefits and other benefits,

• Remuneration of managing directors and board members or other representative bodies,

• income from real estate assets,

• added income,

• Taxation of second and holiday homes (fictitious taxation of the value in use),

• domestic and international pass-through taxation

• Income from investment companies in tax havens.

Income is generally taxable in the year in which it was earned. In principle, the expenses associated with achieving this are also deductible in the respective year.

For spouses, an individual calculation is made at the level of determining income.

Income from employment and related expenses are only allocated to the spouse earning the income. Pension payments are not included. These are generally attributed to the recipient.

Capital income and capital gains, on the other hand, are to be attributed to the persons to whom the underlying assets are assigned according to the relevant property regime. In the event that the spouses live in community of property, the property is divided equally between the spouses, unless another standard of distribution can be justified. However, if a separation of property has been agreed between the spouses, the asset in question will be allocated entirely to the owner.

Income from commercial activity is allocated to the natural person who regularly and directly operates the business.

The basis for calculating the tax is the division of the taxpayer's income from the above categories into current income and extraordinary income.

The usual assessment base includes the net amount of current income (balance of positive and negative income, taking into account capital gains and losses from the sale of assets and subscription rights to shares that were owned by the taxpayer for less than 1 year). The balance of current income is reduced by any allowances, for example family allowances or from pension funds.

Extraordinary income, on the other hand, is capital gains and losses from the sale of assets and subscription rights to shares that were owned by the taxpayer for more than 1 year.

Tax-free income includes, among other things, compensation for injuries, severance pay for layoffs to a certain extent, maintenance payments for children, social security benefits for severely disabled people and salaries for posting to another country. However, the respective maximum limits must be observed.

III. Taxable events for income tax in Spain

1. Income from non-self-employment

Income from non-self-employed work is taxable there if it arises from personal employment carried out on Spanish territory. They result from income (all types of consideration and benefits that the employee receives directly or indirectly for his personal work performance) less tax-deductible expenses and any allowances. The same generally applies to severance payments resulting from the termination of an employment relationship.

The deductible expenses (final regulation in the law) include social security contributions, trade union contributions, mandatory contributions to professional associations, statutory expenses upon termination of an employment relationship and the employee tax allowance. However, the respective maximum limits must be observed here. Further expenses, such as travel costs for the journey to work or work equipment, are generally not recognized.

Monetary benefits are generally fully taxable and are valued based on their cost to the employer or their market price.

Pension payments, administrative and advisory board salaries are viewed as income from non-self-employed work.

2. Income from “economic activity“

Income from “economic activity” is income from commercial and freelance activities. They are always taxable as income from a permanent establishment on Spanish territory and as income earned without a permanent establishment in principle if they arise from economic activities on Spanish territory or if they relate to services that were used on Spanish territory. Income derived from personal performances by artists and athletes on Spanish territory, even if the proceeds go to other natural persons or entities, is also taxed in Spain.

3. Capital income (Rendimientos del capital mobilario e inmobilario)

Tax liability applies to income from dividends, interest and royalties as well as other income from capital assets.

Residential property that is not the owner's primary residence is also taxable. Here there is a fictitious taxation of a utility value. When renting and leasing, the actual net income (rental income less expenses such as maintenance costs or depreciation) is taxable.
Income from life and disability insurance policies, annuities and temporary annuities are treated as capital income and are subject to special calculation rules so that the taxable amount can be reduced to a portion of the income.

4. Capital gains

Both capital gains and losses are generally taxable if they arise from securities issues by residents or corporations or from other movable and immovable property on Spanish territory.

There is a division into short-term (owned by the taxpayer for less than 1 year) and long-term (i.e. owned by the taxpayer for more than 1 year) capital gains. These arise as the difference between the purchase price and the sales price.

There are special regulations for capital investments in tax havens in order to avoid tax avoidance.

In principle, there is full tax relief (reinvestment exemption) when selling the taxpayer's main residence. The entire income must be reinvested in the new main residence; otherwise, partial tax relief may be granted.

Tax exemptions apply to capital gains made by a person aged 65 or over from the sale of their main residence and to donations to tax-privileged institutions.

IV. Tax relief Spain

1. Deductions

Some insurance contributions and contributions to private pension insurance are deductible up to a certain amount. Disabled people and people aged 52 and over can deduct higher amounts. Spousal maintenance payments and statutory maintenance payments are also deductible.

2. Allowances

The standard assessment basis is reduced by the personal allowances and family allowances. The family allowance depends on the number, age and income of dependent relatives. For disabled employees, the allowance increases accordingly depending on the degree of disability.

3. Tax credits

Tax credits are possible for the purchase or renovation of the main residence and for donations to tax-privileged legal entities.

4. Losses

A loss carryback is not possible, but a loss carryforward is currently possible for 4 years.

Capital gains can only be offset within the same type (short-term/long-term); in some cases, the deductibility of capital losses can be postponed under certain conditions.

5. Tax Exemptions

Some of the income earned by non-residents without a permanent establishment is exempt from the non-resident income tax (Impuesto de no Residentes, INR). This includes scholarships, retirement benefits, lottery winnings, bets, raffles, interest and profits from movable assets in another EU country, income from government securities and accounts of non-residents.

V. Tax amount and tax assessment

The standard assessment base is generally taxed according to a progressive table, which is made up of the tax on the basic amount and the marginal tax rate on the additional amount. Income from changes in assets is subject to a uniform tax rate in Spain if the items have been in the taxpayer's assets for more than two years.

In principle, Spanish source income from employment, self-employment, capital income and capital gains earned by resident natural persons is subject to income tax withheld at source.

The assessment period is the calendar year. Spouses can choose between separate and joint assessment. There is no income splitting.

Entrepreneurs and freelancers must submit a tax return and make advance payments every quarter on the 20th of the month following the trimester.

In general, self-assessment is mandatory (submission of the tax return from May 1st to June 30th of the following year), although in some cases the authorities submit a proposal in advance.

B. Wealth tax – Impuesto sobre el patrimonio de las personasphysics (IP)

Wealth tax is levied for the benefit of the 17 independent regions. Every resident natural person is subject to tax. Spouses are required to file separate returns. The assessment basis is basically the entire assets less proven liabilities and personal allowances. Deductions vary depending on the region.

The independent regions are authorized to set their own tax rates within certain limits. If they fail to do this, they will be collected according to a standard table.

The wealth tax must be assessed by the taxpayer himself. The tax return for each calendar year must be prepared together with the income tax return.

The total amount of income and wealth tax may not exceed a certain percentage of the income tax assessment base.

In addition, unlimited taxpayers must provide information about their foreign assets by means of an informative declaration.

C. Inheritance and gift tax (Impuesto sobre Sucesiones y Donaciones, ISD)

The inheritance and gift taxes are in favor of the 17 independentRegions levied, with the right to set their own tax rates within certain limits.

The recipient of the inheritance or gift is liable for tax. The resident of Spain is subject to tax on the gratuitous donations received both at home and abroad. Non-residents are subject to tax in Spain on all assets located in Spain as well as on benefits based on a (Spanish) life insurance contract.

There are fixed allowances for inheritances and legacies, the amount of which depends on the degree of relationship and age of the recipient. In addition, depending on the region, there are allowances for the spouses and children of the deceased for the family business, for investments and for the testator's main residence. The basic requirement for application is that the assets are not sold within a specified period of time.

There is also an asset-related tax surcharge depending on the recipient's net assets and the degree of relationship.

To avoid double taxation, Spain uses the imputation method. The person resident in Spain can deduct either the inheritance or gift tax paid abroad or the Spanish tax payable on the assets, depending on which of the two amounts is lower.

The existing double taxation agreements must also be taken into account. For Germany, for example, there is currently no agreement to avoid double taxation between Germany and Spain with regard to donations and inheritances. Germany also uses the offsetting method for taxes paid in Spain. However, due to the high allowances compared to Spain, this only has an effect for values above this.

D. Trade tax Spain (Impuesto sobre Actividades Económicas, IAE)

Until a few years ago, trade tax in Spain was activity-based and not sales-based. This meant that small businesses were subject to the same trade tax base amount to the same extent as large businesses. Small businesses and freelancers in particular therefore temporarily suppressed this tax. Start-ups were discouraged from investing.

The previously applicable trade tax regulations were changed in 2002. This meant that, under certain conditions, natural persons and some legal entities were exempt from tax.

In addition, natural persons resident in Spain as well as natural and legal persons without a registered office in Spain who operate through a permanent establishment are exempt if their annual business turnover is currently less than EUR 1,000,000.

Companies and other associations with legal personality, civil law companies and communities of property with an annual business turnover of currently less than EUR 1,000,000 are also exempt from trade tax.

This means that 92% of those formerly subject to trade tax are outside the scope of application of the IAE.

E. Income tax Spain – international aspects

I. Residents

Residents are subject to tax on their worldwide income. Exceptions exist up to a certain maximum amount for income from employment abroad, provided it is taxed there, and for dividends from non-resident companies.

Wealth tax is levied on global assets.

Real estate owned abroad is not subject to Spanish property tax.

As a measure to avoid double taxation, the imputation procedure is generally used in Spain, according to which a resident taxpayer with income from abroad can offset certain amounts against his Spanish tax liability in relation to his total domestic and foreign income. After that, either the tax paid abroad on foreign income or capital gains or the Spanish income tax, which is offset against the foreign income, applies.

II. Non-residents

Non-residents are subject to the Impuesto sobre la Renta de No Residentes, IRNR (Income Tax Spain for Non-Residents) on their income and capital gains from Spanish sources. The IRNR regulations also affect corporations without their registered office in Spain.

Non-residents need a Spanish tax identification number for any purposes

1. Permanent establishment

Taxation is based, among other things, on: depending on whether a permanent establishment exists or is considered established in Spain or not.

Permanent establishments of natural persons or corporations can be established on Spanish territory in a variety of ways. These include, among other things, a place of management, branches, offices, manufacturing facilities, workshops, warehouses, business premises, mines, oil or gas wells, quarries, agricultural and forestry operations as well as construction, installation or assembly works whose duration exceeds six months. It is therefore considered that if a non-resident exercises his powers in any way in Spain in a habitual manner, that is to say, he has continuous or main possession of installations or places of work of any kind in which he carries out his activities in whole or in part, or if he is in Spain has an intermediary authorized to act contractually on behalf of and at the expense of the non-resident person or entity, he operates in Spain through a permanent establishment.

The income generated through the permanent establishment is fully taxable in Spain. The basis for assessment is primarily the provisions of the Corporation Tax Act. Tax exemption is granted with respect to certain income.

The so-called provisions for transactions between persons with close business relationships, for those between the permanent establishment and the headquarters or with another permanent establishment of the same entrepreneur must also be taken into account. Payments made by the permanent establishment to the headquarters in the form of license fees, interest, commissions, technical services and due to the use or transfer of goods or rights are generally not deductible. This excludes part of the management and general administrative costs that the central company allocates to the permanent establishment, provided that these are listed in the permanent establishment's accounting and are continuously attributed and are appropriate. To this end, taxpayers must submit valuation proposals to the tax authorities.

The survey period depends on the declared financial year and must therefore not exceed 12 months.

2. Other income

Income from non-self-employed activity that was earned without a permanent establishment is currently taxed at a flat rate of 25%, and for short-term activity it is currently taxed at 2%.
Pension payments are currently taxed at a rate of 0 – 2,392.03 euros on the basic amount and currently 8 – 40% on the additional amount.

Taxable EU citizens can choose to be treated as Spanish residents if they derive at least 75% of their worldwide income from employment or business activity in Spain.

Commercial and freelance income from Spanish sources is currently taxed at 25%.

Dividends, interest and royalties from Spanish sources are subject to final withholding tax; there are no deductions for expenses.

Capital gains from non-residents are currently taxed at 35%, regardless of the length of ownership, and currently at 18% on the sale of holdings from Spanish investment funds.

In order to avoid tax avoidance, when a property located in Spain is sold by non-resident owners, 5% of the purchase price must currently be withheld by the buyer as withholding tax, unless certain exceptional circumstances apply. The purchaser is liable for paying the corresponding amount. The seller can usually do this the tax return with which he can deduct the gain for tax purposes. Under certain conditions he can request the amount back.

Non-residents are subject to wealth tax on assets located in Spain unless they are exempt. Deductions may not be claimed.

Non-residents are also subject to property tax on immovable property located in Spain.

Non-residents who earn direct income from Spanish sources are subject to Spanish income tax on income and capital gains.

With regard to all statements regarding the taxation of non-residents, the respective double taxation agreements DBA must be observed.

There is freedom of establishment in the EU. This means that any legal or natural person from the EU can set up a company in Spain.  However, there are some key features that need to be taken into account when setting up a company, such as the start-up costs, various liability issues, tax regulations and disclosure requirements.