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Once moving to Spain, you may be surprised at some of the differences in the ways – and how much – income is taxed!
How will I determine if I need to pay taxes in Spain once moving?
Tax rates and charges in Spain are dependent on the tax status of an individual. This status relies on how long an individual is in Spain, and if they can establish habitual residence in Spain.
To qualify for the Resident Personal Income Tax in Spain, taxpayers must establish tax residency by spending at least 183 days of the year in Spain or Spanish Territory. It is acceptable if these days are not consecutive, and sporadic absences are allowed for individuals. Additionally, it is assumed that an individual is a tax-resident if their spouse or dependent children reside in Spain. When tax residency is established, individuals will be taxed on their worldwide income.
Once you are a taxpayer in Spain, there are certain minimums above which you are obliged to file the tax form.
Requirements for paying taxes in Spain
You have an obligation to file a Spanish Income Tax Return when your income from Spanish sources exceeds €22,000, or you receive any income outside of Spain. If your income is below €22000, an individual will not be subject to the personal income tax. The minimum income from movable capital and capital gains subject to withholding or payment on account has a joint limit of 1,600 euros per year. On the other hand, the minimum imputed real estate income and income from treasury bills have a joint limit of 1,000 euros per year.
However, it is important to emphasize that any income earned outside of Spain is required to be filed in the tax return, disregarding the limits mentioned in the preceding paragraph.
The deadline to file the personal income tax is until June 30th of the following year, that is to say, to file the personal income tax for 2021, the deadline will be until June 30th 2022.
The Non-Resident income tax for individuals who spend less than 183 days in Spain during a calendar year functions a little differently. These individuals will not be taxed on their worldwide income, and instead will only be taxed on the income they earn from sources located in Spanish Territory.
Income Tax brackets
When first moving to Spain, you may be shocked with the tax brackets!
While the United States also has a progressive income tax, the Spanish tax bracket generally taxes money at lower thresholds and higher rates.
You may be surprised to find that some income taxed in the United States at low rates will be subject to higher taxation in Spain.
This is because your income will be subject to tax in both the state and autonomous community where you reside. The state bracket will remain the same, while autonomous communities have some flexibility to exceed the state tax rate. The community tax may be higher or lower depending on the region and will combine with the state tax to make up the total income tax you will pay. As an example, the tables (for 2020) below show the tables you would be subject to if you come to Barcelona, whose autonomous community is Catalonia:
STATE TABLE
CATALONIA TABLE
Many autonomous communities do change the tax rates to generate more revenue for their region. Unfortunately, in some autonomous communities, this means that residents will be subject to total tax rates reaching as high as 48%! On the other hand, certain regions such as Madrid have the lowest tax rates in Spain, a 43,5%.
In addition, it should be noted that there is a treaty between Spain and the United States to avoid double taxation between these two countries. In this way, taxes paid in the United States on a certain income can be deducted when paying taxes in Spain on that income, and up to a certain limit, stated in the double tax treaty between Spain and the US.
Independent Services
Income earned as a resident of Spain for independent professional services will be taxed in Spain only unless the individual has a regularly accessible fixed base in the United States for the purpose of providing professional services.
Any income exceeding $10,000 derived from artistic or athletic performing services are subject to tax in Spain, including reimbursed expenses.
Spanish Taxes on Pensions
For tax purposes, pensions are understood as remunerations arising from previous employment, they are treated differently depending on whether they are public or private:
Public pension
Public pension: that which is received by reason of previous public employment, whether with a State, one of its political subdivisions or a local entity. Its treatment is:
- In general, public pensions will only be taxed in the United States.
In Spain, they would be exempt, although the exemption does not apply to the tax rate calculation. This means that if the taxpayer is obliged to file a personal income tax return for obtaining other income, the amount of the exempt pension will be taken into account when calculating the tax applicable to the remaining income.
- However, if the beneficiary of the public pension resident in Spain has Spanish nationality, the referred pensions would only be taxed in Spain.
Private Pension
Private pension: means any other type of pension received as a result of previous private employment.
- In general will only be subject to taxation in Spain.
- However, payments made under the Social Security regime to a resident in Spain or a U.S. citizen may also be subject to taxation in the United States, in which case the resident taxpayer would be entitled to apply the international double taxation deduction in Spain, provided that such income has been subject to taxation in the United States based on criteria other than citizenship.
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Interests in Spain
Interest from the United States may be subject to taxation in Spain in accordance with its domestic legislation. This income will be taxed as follows:
| Tax Base | Tax Rate | |
| From | To | |
| 0€ | 6.000€ | 19% |
| 6.000€ | 44.000€ | 21% |
| 50.000€ | 200.000€ | 23% |
| 200.000€ | – | 26% |
This interest may also be taxed in the United States, in accordance with its domestic legislation. However, if the beneficial owner of the interest is a resident of Spain, the tax thus levied in the United States cannot exceed 10% of the gross amount of the interest. In Spain you will be entitled to apply the deduction for international double taxation up to the limit.
Capital Gains
In the United States, capital gains are taxed differently. The amount of time an asset is held impacts the tax paid, and there is a benefit to longer-term investments. If a purchase is held for over a year, it is only subject to a 0%, 15%, or 20% tax rate based on an individual’s income bracket.
While it is possible to not pay taxes on capital gains in the United States, they will all be subject to taxation in Spain. This income will be taxed under the savings income bracket in Spain, reserved for dividends, interests, and capital gains. In Spain, this income will be taxed in the same way as the table in the interest section.
For non-residents, the sate tax capital gains at the flat rate of 24%.
Capital gains derived from Spanish companies will be taxed in Spain, while gains from U.S. companies will be taxed in the United States. To avoid double taxation on capital gains, individuals may claim a tax credit on their U.S. return for the value of income taxes paid to Spain on capital gains.
Exceptions for Capital Gains
However, there is an exemption to capital gains tax when you reinvest the capital gain in the sale of your habitual residence. For example, if you buy a property in Spain with some or all of the money gained in the sale of your previous habitual residence, the percentage of the sale price reinvested will be applied to the overall capital gain as a tax exemption.
For instance, if you were to reinvest 50% of the sale price of your previous habitual residence into the purchase of a new home in Spain, the overall capital gain from the sale of the previous habitual residence will be taxed at a rate reduced by 50%.
To claim this exemption, there are a few requirements. First, you must establish that the property sold was a habitual residence for at least 2 years before the sale. Additionally, the new house purchased in Spain must be bought within two years of the sale of the previous habitual residence. Next, you must begin living at the new property within 12 months after the acquisition of the new house. Finally, it is important that you live in the Spanish residence for 3 years after buying the property.
Dividends
U.S. source dividends may be subject to taxation in Spain in accordance with its domestic legislation. These dividends may also be subject to taxation in the United States, if that is the country where the company paying the dividends is resident according to the legislation of that State. However, if the beneficial owner of the dividends is a resident of Spain, the tax required will have a maximum limit of 15% of the gross amount of the dividends. The resident taxpayer would be entitled to apply the deduction for international double taxation in Spain for personal income tax purposes up to the limit.
In Spain, this income will be taxed in the same way as the table in the interest section.
Income from real estate
Income from real estate property located in the United States may be taxed in both Spain and the United States.
The resident taxpayer would be entitled to apply the deduction for international double taxation in Spain.
It should be noted that if you have apartments, even if they are empty, in Spain they are also taxed by means of an imputation of income, which consists of applying 1.1% to the cadastral value.
Imputed income from real estate will be taxed in Spain without the opportunity to claim tax credit in the United States.
Wealth Tax
Spain has a tax different from the United States that is different from the United States: the wealth tax. If an individual’s net worth exceeds a certain threshold, it will be necessary to file for the wealth tax. These thresholds differ between autonomous regions: Catalonia 500.000 Euros, Andalusia 700.000 Euros, Valencia 600.000 Euros, Balearic Islands 700.000 Euros, etc. Madrid, however, is the only region that exempts 100% of the wealth tax.
As a non-resident taxpayer in Spain, the Spanish Tax system will still require you to pay the wealth tax on assets located in Spain. For both resident and non-resident status, the wealth tax applies to assets over a certain threshold at rates ranging from 0.2% to 2.5%.
In order to avoid filing as a Spanish Tax resident while staying in Spain 183 days, you must declare before the Spanish Tax Authorities that you have tax residency elsewhere by providing a certificate of tax residency in another country for the tax year required.
Additionally, Spanish Tax Authorities will require to file Form 720, the Informative Form on Goods and Assets Abroad if the total value of certain goods exceeds 50.000 Euros in one of the following groups:
- Bank accounts outside of Spain
- Foreign Real Estate
- Shares, investments, pension plans, and insurances located abroad
How can Lexidy Help?
Whether you are a foreigner working in Spain on contract, a high earner with tax residency in Spain, have your company in Spain, or working with a company providing digital services to users in Spain, taxes will look different in 2021.
While these changes may seem complicated and overwhelming, they do not need to be. Working with an expert can make taxes simple, and Lexidy is here to help!
