Tax Advisor, Head of Tax Department of Lexidy
Jose is originally from Galicia but has been living in Barcelona for the past 20 years. He studied Law in the Pompeu Fabra University. After that, he specialised as an International Tax Advisor, focusing on expats management. Languages: English, Spanish and Catalan.
In order to explain some of the possible tax implications of moving to Spain, we present to you the Smiths. We will use their case in order to show you different aspects of tax law in Spain and the implications of moving here from another country.
Ethan and Susan Smith are two US tax residents who have been living in New York for the last fifteen years. They are married, own a lovely apartment in the East Village and a property in the Hamptons.
She works for an US oil company that is considering relocating her to their Barcelona subsidiary. Ethan works as a teacher in Columbia 20 hours a month and as a freelance consultant for insurance companies. Additionally, they have shares in her US oil company that give annual dividends.
They are considering moving to Barcelona in November 2019, buy an apartment there and sell their house in New York. They will keep the Hamptons property, but they will rent it for holiday purposes from September to June and keep it for their own holidays from July to August.
In order to make the information more digestible, we will divide this case study into 4 different aspects to consider:
- Fiscal Residence
- Options to lower the taxes to pay in Spain
- Income taxed in Spain
- Other taxes to be aware of
1.WHAT IS THEIR FISCAL RESIDENCE AND WHAT ARE ITS EFFECTS?
Both Susan and Ethan will be Spanish Non-Tax Residents in 2019, as they will have been in Spain less than 183 during the tax year 2019, which runs from January 1st to December 31st.
As Spanish Non-Tax Residents, they will only pay taxes in Spain on their Spanish sourced income.
During 2019, only Susan obtains Spanish sourced income, which is the employment income corresponding to the work performed in Spain for the subsidiary.
This income will have to be taxed at a 24% flat rate and withheld by the employer. She will have to file a 2019 Spanish Non-Resident Tax Return.
However, for 2020, they will both become Spanish Tax Residents, as are projected to stay in Spain for more than 183 days during the tax year, including sporadic absences (such as Ethan’s trips to work in the US and their holidays in the Hamptons).
As Spanish tax residents, they will have to pay taxes on their world-wide income, at a progressive rate that goes from 19% to 48% on their general income (employment income, consultancy income, rental income and property income) and at a progressive rate that goes from 19% to 23% on their investment income (interest, dividend or capital gains).
As per the Double Taxation Treaty between Spain and the United States, in case they receive any income from the US that is taxed or withheld in the US, they will be able to deduct the paid US taxes from their Spanish Tax Return.
2.WHAT MECHANISMS COULD THEY USE TO LOWER THEIR TAX TO PAY IN SPAIN?
As Susan is relocating to Spain because of a work-related relocation, she could request the application of the Special Regime for Expatriate Workers in Spain, also known as the Beckham Law.
This is a regime under which the taxpayer is deemed as a Spanish Non-Tax resident and is only taxed at a flat 24% on her world-wide employment income, and on their other Spanish sourced income.
The requirements to apply for this regime are that she has not been a Spanish tax resident in the last ten years and that she moves to Spain because of a relocation, new employment contract or an administrator position in a Spanish company. The first 600.000 Euros are taxed at a rate of 24%. Any income above that is taxed at a rate of 45%. The application for this regime must be presented within the first 6 months since the arrival to Spain.
Ethan is not relocating to Spain as a consequence of a relocation, so he cannot apply to be taxed as per the Beckham Law. However, he could apply the exemption on work performed abroad, regarding the employment income from the Columbia University.
The requirements are that work is performed physically abroad, that the cost of the salary is paid by a nonresident company and that the country has a similar tax to Spanish Personal Income Tax.
As this is the case, such employment income will not be taxed in Spain.
Additionally, in order to avoid the capital gain to be taxed in Spain for 2020, because of being Spanish Tax Resident, Ethan would benefit from selling the apartment in 2019, when, as a Spanish Non-Tax resident, he would not be taxed on such a foreign sourced income.
3.WHAT INCOME IS GOING TO BE TAXED IN SPAIN?
In case Susan applies successfully for her income being taxed as per the Beckham Law, she would only have to pay a flat tax rate of 24% on her world-wide employment income, which would be withheld by her employer.
This means that there are some sources of income that she would not be paying taxes for in Spain:
- Rental income from the Hamptons property
- Property income from the Hamptons property
- Capital gains from the eventual sale of the NY apartment
Ethan, in application of the exemption on work performed abroad, will not have to pay taxes on the employment income from Columbia.
However, as a freelance consultant for insurance companies, he will have to pay taxes on his fees for his consultancy services.
Freelance income is taxed at a progressive tax rate that goes from 19% to 48%. However, he will be able to deduct the expenses that he faces because emanating from this activity from the income he perceives. For instance, buying a new laptop, trips to the US, phone bills, Social Security contributions, coworking space rental, etc.
Regarding the rental income of his Hamptons property, it will be taxed at such progressive tax rate as well. The taxable amount is the difference between the income he receives and the expenses incurred during the rental, such as the insurance, mortgage, ownership community, repairs, management and depreciation of the property. The income must be allocated between him and Susan according to their property ownership percentage.
Even if they decided not to rent the property, there is the property income to be kept in mind. This is a tax on the mere ownership of the property. Its calculation is to apply a 1,1% to 50% of the acquisition value. The result is the taxable income which will be taxed at the rates detailed above.
The dividends from the US oil company will be taxed as investment income, which is taxed at a progressive rate that goes from 19% to 23%. Of course, he will be able to deduct the management fees on such dividends to determine the taxable amount.
If they decide to sell the property, they may obtain a capital gain. The capital gain is the difference between the sale value and the acquisition value. The acquisition value is the acquisition price plus all the expenses on the acquisition, such as taxes, lawyers and similar. The sale value is the sale price minus all the expenses in the sale.
However, they may be able to apply an exemption on the capital gain, in case they reinvest the sale value of their habitual residency into the acquisition of a new habitual residency and certain requirements are met.
4.ARE THERE OTHER TAXES THEY SHOULD BE AWARE OF?
Wealth Tax taxes the net wealth of the taxpayer, if their net wealth surpasses the 500.000 Euro threshold. However, 300.000 Euros on the habitual residency are exempt from such calculations.
If the value of the US oil company shares, Hamptons net value (which is the acquisition value minus the mortgage) and the Spanish property value over 300.000 Euros that corresponds to Ethan is over 500.000 Euros, Ethan will have to pay taxes on his wealth as per a progressive rate that goes from 0,21% to 2,205%.
Via this informative form, Ethan must inform the administration regarding the following groups of assets:
- Accounts and deposits in banking institutions abroad
- Securities representing the holdings in equity for any kind of entities abroad (shares, shares in collective investment institutions, insurances, annuities)
- Real estate ownership or other rights abroad
Ethan will have to inform on the referred assets in case the whole value for all the assets included under each paragraph is over 50.000 euros. If this is the case, a form must be filed including only the assets and goods included under the group.
Although this form is merely informative and does not come with an obligation to pay, not filing this form or including wrong information can lead to serious penalties.
Susan, in case she is treated as per the Beckham law, does not have the obligation to file the Informative Form on Goods and Assets Abroad. (Click here for more information on 720FORM)
However, she will have the obligation to file a Wealth tax declaration in case her assets in Spain surpass the 500.000 Euro threshold.
We are international lawyers experts in the subjection to taxes in Spain. At Lexidy Law Boutique, our experts will be glad to assist you in al your Spanish Tax regarding needs.