Spain’s tax system is based on a progressive income tax, with rates ranging from 19% to 47% for personal income tax. Value-added tax (VAT) is a major source of government revenue, with a standard rate of 21%. Other taxes include wealth tax, inheritance tax, and taxes on property and capital gains. The government also collects social security contributions from employees and employers. As early retirees with significant capital and low income, we will delve into tax residency, investment income and wealth tax.
Disclaimer: we are not financial nor fiscal advisors. All information provided below were collected during our research to understand the tax system in Spain. It might be incomplete nor applicable to your own situation. You should do your own research and seek professional legal and fiscal advise.
Federal tax system
Spain has a federal tax system where both the national government and regional governments have the authority to impose taxes. It is similar to Switzerland or the USA but opposite to other countries such as France, Thailand or Hong Kong. As such, your taxes are dependent on the place you live within the country. Although the structure is similar, the rates of taxes can vary widely from one region to another one.
Tax residency
Spain considers a resident a person who spends more than 183 days in the country, like most countries. However, we would recommend our community to read the Double Taxation Treaty (DTT) between the country they are coming from and Spain. A simple Google search should point you in the right direction. As an example, I have linked out the DTT between the United Arab Emirates and Spain here.
Every single word matters because it can have a massive difference on your tax situation. I have extracted Article 4 of the UAE and Spain DTT as an example below.
Article 4
RESIDENT
- For the purposes of this Convention, the term “resident of a Contracting
State” means:(a) in the case of the Kingdom of Spain, any person who, under the laws of
Spain, is liable to tax therein by reason of his domicile, residence, place of
management or any other criterion of a similar nature, and also includes
Spain and any political subdivision or local authority thereof. This term,
however, does not include any person who is liable to tax in Spain in respect
only of income from sources in Spain or capital situated therein;Extract from DTT between Spain and the UAE.
(b) in the case of the United Arab Emirates, an individual who has his domicile in
the United Arab Emirates and is a national of the United Arab Emirates and a
company which is incorporated in the United Arab Emirates and has its place
of effective management there.
There is an important nuance of a definition of a resident between each country. From the point of view of Spain, which is similar to many countries, a resident is a person of whatever nationality who has domicile in Spain […]. However, the UAE considers a resident a person who has is domicile and is a national of the UAE (which is rather uncommon). The implication is important. Indeed, only UAE nationals (and not UAE residents) will be eligible under this DTT to avoid double taxation.
Consequences of no partial year residency
Spain has a specificity versus other countries. As mentioned by PWC, Spain doesn’t recognize partial year residency. According to Spanish law, a person is either a resident or a non-resident for the full year. However, most other countries accept this partial year residency. Let’s say you move from Hong Kong to France on May 1st, Hong Kong and France agreed that all your income between January 1st and April 30th will be taxed in Hong Kong, and all the rest of the year income will be taxed in France (except rental income).
In Spain, as soon as you cross the 183 days within a year, you are considered a tax resident for the full year. How does it work in practice? If you move to Spain on September 1st, all your incomes before August 31st will be taxed in your previous country. Then all your income earned from September 1st till the end of the year will be taxed in Spain as if you were a non-resident (24% income tax rate). You will become a Spanish tax resident on January 1st of the following year.
However, if you move to Spain on May 1st, Spain will consider you as a tax resident for the full year. Spain will tax all your worldwide incomes from January 1st. Yes, you read it correctly. If your country of origin has a DTT and/or isn’t consider a tax heaven, Spain might give you a credit on the taxes you will pay in your country of origin.
It might come as a surprise, but you should pay much attention on your moving day. In 2023, July 3rd marks 183 days in the year. Any move to Spain before that date will make you a Spanish Tax Resident for the full year of 2023. If you are coming from a country such as the UAE or Hong Kong which don’t tax capital gains, you will likely have to pay taxes in Spain on theses gains if they occur between January 1st and July 3rd. In order to avoid being in this situation, you should consider moving to Spain after July 4th.
Investment income
All income generated from investments, such as dividends, coupons, interests or capital gains are considered to be of similar nature, and are taxes all together. The tax percentage increases according to the income tier as the chart below.
| From | To | Tax Rate |
| 0 | 6,000 | 19% |
| 6,000 | 50,000 | 21% |
| 50,000 | 200,000 | 23% |
| 200,000 | 26% |
Wealth tax
The Wealth tax is based on all your assets worldwide as long as they reach 50,000 Euros in any of the three categories:
- A) Securities, Bonds, stocks, crypto….
- B) Real estate property,
- C) Bank accounts.
Furthermore, there is no need to split your cash in multiple accounts of 49,000 Euros as you are supposed to aggregate their value on December 31st. Same goes for your assets such as securities or stocks which were spread across several broker accounts.
Allowance per person
There is an allowance per person. Nationally, it has been set at 700,000 Euros per person with an extra 300,000 Euros on your primary residence. Nevertheless, some regions have set up different thresholds. Madrid has scrapped the wealth tax all together, so you don’t have to worry about it. However, in Valencia for example, the allowance has been reduced to 500,000 Euros for your assets, and 300,000 for your primary residence.
As the allowance is per person, a couple can cumulate both allowances and thus be imposed on wealth above 1,400,000 Euros of assets and 600,000 Euros for your primary residence. This should be ample for most people. However, there is a caveat. Opposite to Income tax which can be filled jointly, the wealth tax has to be filled individually. Thus, if most of the assets are under one person within the household, that person will only benefit from his own allowance and will have to pay taxes above its individual allowance. It is therefore not uncommon for one person to pay wealth tax, whereas the spouse will leave some allowance unused. If the assets are under joint name, the value of the assets can be split in half between the couple.
Wealth tax rates
The tax starts at 0.2% and increases progressively, all the way up to 3.5%. Details about the tax percentage and tiers can be found here: Tax tables for Spain in 2022. It is therefore critical to understand how to limit the tax.
The 60% cap
The wealth tax shouldn’t exceed 60% of your income base, and not on income tax. Let’s say that you earn 1,000 Euros but are subject to a wealth tax of 5,000 Euros, your final wealth tax will be capped at 1,000 x 60% = 600 Euros.
The 20% minimum
There is also a minimum amount of wealth tax to pay which is 20% of your theoretical wealth tax. For example, you still earn 1,000 Euros, but you are subject to a wealth tax of 5,000 Euros. With the 60% cap rule, your wealth tax should be limited to 600 Euros. However, the 20% minimum still applies to your 5,000 Euros. Thus, your wealth tax becomes 1,000 Euros (5,000 x 20%).
I agree that it is complicated but I think it is important to know these rules, You can therefore decide if it is worth to earn some income, or simply live off your assets.
Residency and wealth tax
If you are a tax resident of Spain, your wealth tax is based on your worldwide assets. However, if you are a non-resident, only your assets in Spain are taken into consideration. Keep that in mind when you are deciding to move to Spain in the middle of the year. As we discussed above, the day you move has an impact not only on your income tax, but also on your wealth tax.
Thoughts about optimizing taxes in Spain
Big Brother is watching you
We would never suggest omitting to disclose your income or your assets. Since 2013, OECD countries have enter into an agreement to fight against tax evasion, by establishing the Automatic Exchange of Information. As such, they have defined a CRS (or Common Reporting Standard) to share the information about their tax residents with other countries. Nowadays, there is no money that you can hide, as it might have already been shared with your home’s country tax authority.
Optimization based on the place you live
Nevertheless, optimising your tax burden is legal as long that you do it legally. If you are an early retiree, you likely would have significant capital to finance your lifestyle. As you have to declare it, your options to minimize the wealth tax, you could either move to Madrid (no wealth tax), or move to a region with a higher allowance and/or minimize your income.
Optimization with Accumulating UCITS ETF
Receiving dividends, coupons or interests are usually part of passive income strategy. Moreover, they have a positive psychological impact as you continue to receive some income. However, these incomes will be taxed between 19% to 26% and will likely lift up the current 60% cap affecting your wealth tax. Thus, investment income in sub-optimal in a tax optimization strategy. You should consider investing your assets into Accumulating UCITS ETF. These ETF don’t distribute any income. All incomes are automatically reinvested into the ETF. As Spain taxes capital gains only on realized gains (not on latent capital gains), you will be taxed only when you sell your ETF and if you earn some capital gains. Furthermore, the capital gains can be offset by capital loss.
Optimization with Beckham’s law
Beckham’s Law is a tax rule named after the former English footballer David Beckham that was introduced in Spain in 2005. The law allows high-earning foreign professionals, to be consider non-residents from a tax point of view. Consequently, reducing personal income tax rate to 24% on Spanish income instead of the standard rate of up to 43%. This was designed to attract top talent to Spain and boost the country’s economy. Naturally, an individual must meets certain criteria to be eligible. It’s important to note that the law has been modified several times and its scope has changed. So, it’s advisable to consult with a tax professional or lawyer to confirm the current status of the law and determine if it’s applicable to a specific individual’s circumstances.
There is so much that can be discussed about Spain’s taxes. This post aims to give you an introduction to Spain’s tax system and its main components. More research will be needed to suit your needs. As mentioned before, we are not financial advisors nor fiscal advisors. You may also consider hiring a professional accountant or lawyer to help you assess your personal situation.
If you think that Spain’s taxes are manageable, you could review our separate post about Spain’s 2023 Digital Nomad visa.
What have been your biggest surprises about taxes in Spain? Would you have any learnings to share with our community? Knowledge is power, so master the system to enjoy a Happy FireCracking!
Image credit to Pixabay.com
Hi FC Papa & Mama, thanks for writing this post. It’s a good read and it helps me a lot. We’re also a mixed couple so I can totally relate to some situations you mentioned in other articles. I’m curious about one thing, since you’re from France, how come Spanish government can know if you truly stay in Spain for over 183 days if you pass through the border without any check?
Hi zuppa,
Thanks for your message. There are no controls at the borders because there are no borders. However, you are supposed to register yourself when you move to another country within EU. Without this local ID, it is challenging to open bank account (if you need a local one), rent a place, register for social benefits like healthcare.