The modern Spanish tax system began its development with the introduction of the "Castilian" (Latin) system, which lasted for over 100 years. A gradual reform process began in 1975. Amendments were also made to the General Tax Law in connection with the Kingdom of Spain's accession to the European Union on January 1, 1986. The General Tax Law of Spain (December 17, 2003) forms the basis of modern tax legislation.
Historical conditions and the varying levels of economic development among regions are the reasons for the unique taxation practices of this multinational country.
Tax authority is vested in:
• the state;
• autonomous communities;
• municipalities.
Types of taxes:
• direct – on income of individuals and businesses, property, inheritance, or gifts;
• indirect – on civil transactions, VAT, alcoholic beverages, fuel, tobacco products, luxury goods, electricity, etc.
Who pays taxes?
• Residents;
• Non-residents.
More about the main taxes
According to the provisions of Law No. 35/2006 of November 28, 2006, and Royal Decree No. 439/2007 of May 30, 2007, direct income tax is levied monthly on every individual resident in the country who:
• has legally resided in Spain for at least two years;
• has resided in Spain for at least 183 days in each tax year;
• has income in the Kingdom.
The personal income tax (IRPF — Impuesto sobre la Renta de las Personas Físicas) is levied on income from employment, entrepreneurial activity as a sole proprietor, profits from the sale and rental of real estate, and dividends. This tax is progressive and depends on the annual amount of income. Its minimum rate is 19%.
The minimum income tax rate varies by region. Residents of Catalonia pay the highest (21.5% on income up to €12,450). The maximum income tax rate depends not only on the region but also on the amount. For example, residents of Madrid pay 43.5% on income over €60,000, while Andalusians and Valencians pay 48% on income over €120,000.
The general income tax rate for non-residents (IRNR — Impuesto sobre la Renta de no Residentes) is 19% for citizens of the EU, Norway, and Iceland, and 24% for citizens of other countries.
Citizens of countries with which Spain has double taxation treaties are exempt from paying taxes: 21% on share purchases and sales, and 19% on money transfers abroad.
Important clarification: Spanish residents are required to deduct certain amounts from income earned worldwide, while non-residents only pay VAT on income earned within the country.
Business activities of legal entities in Spain are subject to the following taxes:
1. VAT (IVA - El impuesto sobre el valor añadido). According to Law No. 37/1992 of 28.22 and King Juan Carlos Decree No. 1624/1992 of 29.12.1992, IVA is levied on the purchase of goods and services within Spain and is generally 21%, with lower rates for certain services and goods.
Non-residents have an advantage: they can reclaim the IVA on goods upon leaving Spain.
2. Corporate Income Tax (IS - Impuesto sobre Sociedades) is currently 25%. It is levied annually.
Property Taxes in Spain
• VAT is 10% for residential properties and 21% for commercial properties or land. This is paid when purchasing a new property from a developer. For new homes in the Canary Islands, VAT is called IGIC (Impuesto General Indirecto Canario) and is 4.5%.
• Stamp Duty (IAJD — Impuesto sobre actos jurídicos documentados) is approximately 1% of the property value, but may vary depending on the region.
For legal entities, the purchase of commercial real estate is not subject to VAT: they only pay stamp duty of 1.8% of the purchase price.
• Property Transfer Tax (ITP — Impuesto de Transmisiones Patrimoniales).
Payable when acquiring "secondary" movable or immovable property. The national average rate is 7%.
• Reserve Tax on Income. Paid if the seller of the property is a non-resident. The buyer pays 3% of the property's value to the tax authorities using Form 211.
• Personal Income Tax (IRPF — Impuesto sobre la Renta de las Personas Físicas). As previously noted, the IRPF income tax rate in Spain is progressive. The starting rate is 19% and reaches 48% for incomes of €60,000 per year. It is important to note that progressive rates are applied not to the total amount of income received, but to each portion of it.
• Non-Resident Income Tax (IRNR — Impuesto sobre la Renta de no Residentes). If the seller is a non-resident of Spain, the profit from the sale is subject to non-resident income tax. When renting out Spanish property, a non-resident owner pays income tax. The tax rate is 24% of 2% of the cadastral value of the property. Filing the IRNR declaration is an annual obligation for every non-resident.
• Plusvalia (El Impuesto sobre el Incremento del Valor de los Terrenos de Naturaleza Urbana). A tax levied on the increase in value of urban land. The tax is calculated based on the length of ownership, location of the property, and its cadastral value.
• Associated fees. Notary fees, legal services, property registration (state fees), property inspection for encumbrances, utility bill arrears, etc. are all borne by the buyer.
Other taxes, state fees, and regular expenses related to real estate:
• IBI (Municipal Tax) - from 0.4% to 1.1% of the taxable base.
• Annual Wealth Tax (IP - Impuesto Sobre Patrimonio). Payable if the income tax base exceeds €700,000.
• Community Tax. A monthly fee paid by the residents' council for the maintenance of common areas, including minor repairs.
• Utility Bills (Gastos de comunidad).
• Waste Removal Tax. Typically included in the water bill.
For proper tax optimization, it is necessary to consult a reliable tax advisor.
If you're planning to obtain a residence permit, invest in a country's economy, or purchase foreign real estate, we invite you to a consultation with our company. During a personal online meeting, we'll discuss your questions in detail and create a step-by-step action plan for you.