Tax guide for Americans in Spain
This guide delves into the key tax considerations for US expatriates in Spain, offering insights into everything from income declarations to special levies.
Whether you're a long-term resident or just considering a move to the Iberian Peninsula, this comprehensive tax guide is designed to illuminate the path for Americans in Spain.
Overview of Spain
| Primary tax form for residents | Spanish personal tax return (Declaración de la Renta). |
| Tax year | January 1 – December 31 |
| Tax due date | June 30 |
| Criteria for tax residency | Residence in Spain or more than 183 days in a year. |
| US tax filing requirements | Must file Form 1040 and report worldwide income. |
| Eligibility for FEIE | Qualify under the physical presence or bona fide residence test. |
| Methods of Double Tax Relief | Available through the US-Spain tax treaty and foreign tax credits. |
| Tax residency for dual citizens | Taxed by both countries, but the treaty helps to avoid double taxation. |
| Estate and inheritance tax | Spain has inheritance tax and US estate tax may apply. |
| Overview of local tax rates | Progressive rates up to 47% plus regional taxes. |
Resident vs. non-resident of Spain
In Spain, an individual's tax obligations are primarily determined by their residency status. Residents are typically subject to taxation on their worldwide income, meaning they are taxed on income earned both within and outside of Spain.
On the other hand, non-residents are only taxed on income that is sourced within Spain, such as wages earned from a Spanish employer or rental income from a property located in Spain.
Who can be considered a resident of Spain
The criteria for determining residency in Spain are specific. An individual is considered a tax resident in Spain if any of the following conditions are met:
- They spend more than 183 days in Spain during a calendar year. These days do not need to be consecutive. It's important to note that temporary absences are generally counted as days spent in Spain unless proven otherwise.
- Their main center of business or economic activities is based in Spain. This means that if the core of an individual's professional activities or economic interests is located in Spain, they may be considered a resident for tax purposes.
- Their spouse and dependent minor children reside in Spain. Even if the individual spends less than 183 days in Spain, they may still be considered a resident if their immediate family lives in the country.
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Types of taxes and rates in Spain
Spain, like many countries, has a multifaceted tax system designed to fund public services and redistribute wealth.
For individuals, understanding the types of taxes and their respective rates is crucial, especially if you're considering living, working, or investing in Spain.
Below we have listed the TOP-7 taxes that you should be familiar with before moving to Spain.
1. Personal income tax (Impuesto sobre la Renta de las Personas Físicas, IRPF)
The rates for IRPF are progressive, meaning they increase as the taxable base increases. The rates vary depending on the autonomous community in which the taxpayer resides.
Generally, the rates can range from 19% for lower income brackets to as high as 47% for higher income brackets. It's essential to check the specific rates for the region in which you reside.
Income is broadly categorized into general and savings income.
General income includes wages, business income, and rental income, while savings income includes interest, dividends, and capital gains. Each category is taxed differently, with savings income typically benefiting from lower rates.
Here is a breakdown of the general income tax rates applicable in 2024:
| Taxable income (EUR) | Tax rate (%) |
| 0-12,450 | 19 |
| 12,450-20,200 | 24 |
| 20,200-35,200 | 30 |
| 35,200-60,000 | 37 |
| 60,000-300,000 | 45 |
| 300,000 and above | 47 |
Non-residents are subject to a 24% flat tax rate on income sourced from Spain.
Savings taxable income is taxed at the following rates:
| Taxable income (EUR) | Tax rate (%) |
| 0-6,000 | 19 |
| 6,000-50,000 | 21 |
| 50,000-200,000 | 23 |
| 200,000-300,000 | 27 |
| 300,000 and above | 28 |
2. Value-added tax (Impuesto sobre el Valor Añadido, IVA)
Spain has three main IVA rates:
- Standard Rate: 21% - Applied to most goods and services.
- Reduced Rate: 10% - Applied to certain essential goods and services, such as food, water supplies, and some pharmaceutical products.
- Super Reduced Rate: 4% - Applied to basic necessities like bread, milk, books, and medicines.
Businesses are required to register for VAT, collect it from customers, and remit it to the tax authorities. They can also claim credits for VAT paid on business-related purchases, ensuring that the tax is only borne by the final consumer.
3. Wealth tax (Impuesto sobre el patrimonio)
Wealth tax in Spain is a tax on the net wealth of individuals, assessing the value of their worldwide assets less liabilities.
The rates are progressive, ranging from 0.2% for net wealth up to 167,129 EUR to 3.5% for net wealth over 10,695,996 EUR.
However, these rates may vary depending on the autonomous community in which the taxpayer resides.
If a regional authority doesn't set its own tax-exempt threshold, the Spanish law's limit of 700,000 EUR will be in effect. For non-residents in Spain, the threshold set by Spanish law always applies.
4. Gift and inheritance tax (Impuesto de sucesiones y donaciones)
Gift and inheritance tax in Spain is levied on the transfer of property by gift or inheritance.
Tax rates and exemptions vary widely between the Autonomous Communities, resulting in a significant difference in tax liability depending on the residence of the recipient.
Both residents and non-residents can be taxed, although non-residents are only taxed on assets located in Spain.
Tax rates are progressive and start at 7.65% (0-7,993 EUR), up to 34% (over 797,555 EUR).
5. Property tax (Impuesto sobre Bienes Inmuebles)
The tax is calculated based on the cadastral value of the property, which is determined by the local council.
Rates vary depending on the municipality and the type of property, but they generally range between 0.4% to 1.1% of the cadastral value.
Property owners receive an annual tax bill, and it's essential to pay this tax on time to avoid penalties. The funds collected from IBI are used to finance local services and infrastructure.
6. Tax on the increase of urban land value (IIVTNU)
The tax is levied on the increase in the value of urban land when it's sold or transferred. The tax is calculated based on the increase in the land's value since its last transfer and the number of years the seller owned the property.
The rates and calculation methods can vary by municipality. It's worth noting that this tax has been a subject of debate and legal challenges, especially in cases where property owners sold at a loss but were still liable for the tax.
7. Exit tax
Spain's exit tax is designed to prevent tax avoidance by individuals who move their residence out of Spain while holding significant unrealized capital gains.
The tax applies to Spanish residents who have lived in Spain for at least ten of the last 15 years and are transferring their tax residence to another country.
If these individuals hold shares or equity interests worth more than 4 million EUR or have a stake of 25% or more in a company worth more than 1 million EUR, they may be subject to the exit tax on the unrealized gains of these assets.
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Book free consultationTaxable vs non-taxable income in Spain
Spain, like many countries, has a comprehensive system for determining what types of income are taxable and which are not.
This distinction is crucial for both residents and non-residents who earn income in Spain, as it directly impacts their tax liability.
Here, we delve into some specific types of income and how they are treated under Spanish tax law.
Taxable income
1. Employment income
Employment income is one of the primary sources of income for most individuals, and in Spain, it is fully taxable.
This includes wages, salaries, bonuses, and other remunerations received by an employee for services rendered to an employer.
The employer is responsible for withholding the appropriate amount of income tax and social security contributions from the employee's gross salary and remitting it to the tax authorities.
2. Equity compensation
Equity compensation refers to non-cash compensation that represents a form of ownership interest in a company.
This can include stock options, restricted stock units (RSUs), and other forms of equity awards.
In Spain, the taxation of equity compensation depends on the nature and timing of the award. Generally, the difference between the fair market value of the shares at the time of exercise (or vesting) and the amount paid by the employee (if any) is considered taxable income.
This income is subject to income tax and social security contributions. However, there may be specific exemptions or reductions available, especially for long-term holdings or under certain incentive plans.
3. Business income
In Spain, business income encompasses the earnings generated from the operation of a trade or business.
This includes profits from sales, services rendered, and other regular business activities. Sole proprietors, partnerships, and corporations are subject to taxation on their business income.
The tax rate and deductions available vary depending on the legal structure of the business. For instance, sole proprietors might be taxed at individual income tax rates, while corporations are subject to the corporate tax rate.
It's essential for businesses to maintain accurate financial records, as expenses directly related to the operation of the business, such as rent, salaries, and supplies, can be deducted from gross income to determine the taxable business income.
4. Capital gains
Capital gains in Spain refer to the profit realized from the sale or exchange of a capital asset, such as stocks, real estate, or other investments.
The difference between the sale price and the original purchase price (or cost basis) represents the capital gain.
Spain differentiates between short-term and long-term capital gains:
- Short-term gains, from assets held for less than a year, are taxed at regular income tax rates.
- Long-term gains, from assets held for more than a year, benefit from reduced tax rates.
It's worth noting that specific exemptions and deductions might apply, especially for the sale of a primary residence or reinvestment of gains into certain assets.
5. Dividend income
In Spain, dividend income is subject to taxation. However, a significant change in recent years is the elimination of the dividend tax credit, which previously allowed individuals to reduce their tax liability on dividend income.
Now, dividends are taxed at progressive rates, depending on the total amount of dividend income received
Spain has double taxation treaties with the United States. This treatment aims to prevent the same income from being taxed in both countries. Therefore, US expatriates receiving dividends from US corporations might be eligible for a tax credit in Spain for taxes paid in the US.
6. Interest income
Interest income in Spain primarily arises from savings accounts, fixed deposits, bonds, and other debt instruments.
The Spanish tax system treats interest income as savings income, and it's subject to a flat tax rate.
7. Lease income
Lease income, or rental income, pertains to earnings generated from leasing out the property, whether residential, commercial, or industrial.
In Spain, property owners must declare this income on their annual tax returns.
However, they can also deduct related expenses, such as property taxes, maintenance costs, and mortgage interest, to determine the net taxable lease income.
Non-resident property owners are also liable to pay tax on rental income derived from Spanish properties, albeit at different rates.
Non-taxable income
Spain recognizes certain types of income as exempt from taxation, aiming to provide relief to taxpayers in specific situations or promote certain economic activities. Some examples of exempt income include:
- Awards related to literature, art, and science.
- Compensation for job termination is up to the boundary set by Spanish labor laws. The tax-free amount is capped at 180,000 EUR.
- Benefits from social security or from other entities that step in for social security due to complete and permanent inability to work or severe disability.
- Child maintenance is given to a parent as decreed by a court.
- Earnings from employment for tasks performed overseas provided the income is taxed in a manner similar to the Spanish PIT, with certain restrictions and terms (refer to the section on Taxes on personal income for more details).
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Tax deductions for U.S. expats in Spain
Fortunately, Spain provides several tax deductions that can significantly reduce the taxable income for expats. Here's a closer look at some of the key deductions available.
Employment expenses
Expatriates working in Spain can claim deductions for certain employment-related expenses.
These include:
- Travel and Commuting: Costs incurred while traveling for work, excluding the regular commute to and from the workplace, can be deducted. This includes transportation, accommodation, and meal expenses during business trips.
- Training and Education: Expenses related to professional training or courses directly related to the job can be deductible. This ensures that individuals can continue to enhance their skills without bearing the entire financial burden.
- Work Uniforms: If an employer requires specific uniforms or protective gear, the costs associated with purchasing and maintaining these items can be deducted.
Business expenses
For expatriates who run their own businesses in Spain, a broader range of deductions is available:
- Office Rent and Utilities: If you rent a space specifically for your business operations, the rental costs, along with utilities like electricity, water, and internet, can be deducted.
- Equipment and Supplies: The purchase of necessary business equipment, from computers to machinery, and everyday supplies can be deducted.
- Marketing and Advertising: Costs associated with promoting the business, whether through traditional advertising, online marketing campaigns, or public relations efforts, are deductible.
- Professional Services: Fees paid to accountants, lawyers, consultants, or other professionals who assist in business operations can be claimed as deductions.
Deductible expenses from real estate income
Expats who own property in Spain and earn rental income can benefit from several deductions:
- Maintenance and Repairs: Costs associated with maintaining or repairing the property to keep it in a rentable condition can be deducted. This includes expenses like painting, plumbing, or electrical work.
- Mortgage Interest: If the property is financed through a mortgage, the interest paid on the loan can be deducted from the rental income.
- Property Management: Fees paid to property management companies or agents for services like tenant screening, rent collection, or property maintenance are deductible.
- Local Taxes and Community Fees: Property taxes or community fees paid for the upkeep of common areas in apartment complexes or gated communities can be deducted.
Deductible expenses from moveable capital income
Moveable capital income in Spain refers to income derived from movable assets such as dividends, interest, and royalties. Expatriates can benefit from specific deductions on this type of income:
- Banking Expenses: Costs associated with managing bank accounts that generate interest income can be deducted. This includes account maintenance fees and transaction charges.
- Withholding Tax: If taxes have been withheld at source from dividends or interest income, these can be credited against the final tax liability, preventing double taxation.
- Investment Advisory Fees: Fees paid to financial advisors or investment managers for managing assets that generate moveable capital income can be deductible.
Losses
In the realm of investments and business, not all ventures are profitable. Spain's tax system acknowledges this reality:
- Capital Losses: If an individual incurs a loss from the sale of assets, such as stocks or property, these losses can offset capital gains in the same year.
If the losses exceed the gains, they can be carried forward to offset future capital gains. - Business Losses: Entrepreneurs and business owners can deduct losses incurred in their business activities from other income sources.
If the business losses exceed other income, they can be carried forward to reduce taxable income in subsequent years.
Social security in Spain
Spain's social security system is comprehensive and designed to provide protection against various life events, from unemployment and illness to old age and family responsibilities.
Every worker in Spain, whether a citizen, resident, or expatriate, is required to contribute to the social security system based on their income. In return, they gain access to a range of benefits:
- Healthcare: Contributors and their dependents have access to Spain's public healthcare system, which offers a wide range of services, from general consultations to specialized treatments.
- Unemployment Benefits: If a worker loses their job involuntarily, they may be eligible for unemployment benefits, which are calculated based on their previous earnings and the duration of their contributions.
- Maternity and Paternity Leave: Spain offers generous maternity and paternity leave policies, with both parents entitled to time off work with pay after the birth or adoption of a child.
- Disability Benefits: Those who suffer from an illness or injury that prevents them from working can access disability benefits, which vary depending on the severity of the condition.
Spain pension system
The system operates on a pay-as-you-go basis, where current workers' contributions fund the pensions of current retirees, with the expectation that future workers will, in turn, fund their pensions.
- Eligibility: To qualify for a retirement pension in Spain, individuals typically need to have contributed to the social security system for a minimum number of years and reached the official retirement age, which is gradually increasing and is set to reach 67 by 2027.
- Calculation: The amount of the pension depends on two main factors: the base rate, which is calculated based on the average earnings over a specified period, and the number of years of contributions. The longer one contributes, the higher the percentage of the base rate they receive as a pension.
- Supplementary Pensions: In addition to the state pension, individuals can contribute to private pension plans, known as "planes de pensiones," which offer tax advantages and provide additional income in retirement.
Tax credits for expats in Spain
While the Spanish tax system is comprehensive, it also provides several tax credits designed to alleviate the tax burden on residents, including expats.
These credits can significantly reduce the tax payable, making Spain an even more attractive destination for foreigners.
Habitual residence tax credit
One of the primary tax credits available to expats in Spain is the habitual residence tax credit. This credit is designed for individuals who purchase a home in Spain and make it their primary residence.
The credit aims to ease the financial burden associated with acquiring a home, recognizing the significant investment involved.
Eligibility: To qualify, the purchased property must be the taxpayer's primary residence for a minimum period, typically several years.
Amount: The credit amount is a percentage of the amount invested in the acquisition or improvement of the habitual residence. The exact percentage can vary based on specific conditions and regulations.
Duration: The credit can be applied over several years, allowing taxpayers to benefit from the deduction for an extended period.
Tax credits applicable to payers who carry on business activities
Spain encourages entrepreneurial ventures and self-employment by offering tax credits to PIT payers engaged in business activities:
- Investment in Fixed Assets: Taxpayers can claim credit for investments in new fixed assets and real estate used in their business activities.
- Research and Development: Credits are available for expenses and investments related to R&D activities, promoting innovation and technological advancement.
- Employment: Hiring certain groups of individuals, such as those with disabilities or the long-term unemployed, can qualify businesses for specific tax credits.
- Environmental Investments: Businesses that invest in assets that contribute to environmental protection can benefit from tax credits, promoting sustainable practices.
The tax treaty between the US and Spain
The primary goal of the tax treaty is to eliminate double taxation, where an individual or entity might be taxed on the same income in both countries. This treaty ensures that income is taxed in one country, with provisions to claim relief or credits in the other.
- Residency: The treaty provides clear guidelines on determining residency for tax purposes, ensuring that individuals are only taxed as residents in one of the two countries.
- Dividends, Interest, and Royalties: Special provisions exist for the taxation of dividends, interest, and royalties. Typically, the country of source (where the income originates) has the primary right to tax, with reduced rates or exemptions available under the treaty.
- Employment Income: For expatriates working abroad, the treaty specifies conditions under which employment income is exempt from taxation in the host country, usually based on the duration of stay and the source of payment.
- Mutual Agreement Procedure: In case of disputes or double taxation issues, the treaty provides a mutual agreement procedure, allowing competent authorities from both countries to resolve the matter collaboratively.
Most popular tax forms for US expats
For US citizens and green card holders living in Spain, staying compliant with US tax obligations is crucial. Here are some of the most commonly used tax forms by US expatriates:
- Form 1040: This is the standard US Individual Income Tax Return form. All US citizens and residents, including those living abroad, must file this form if they meet the minimum income requirements.
- Form 2555 (Foreign Earned Income Exclusion): US expats who earn income in Spain can use this form to exclude a certain amount of their foreign-earned income from US taxation, provided they meet specific residency or physical presence tests.
- Form 1116 (Foreign Tax Credit): If a US expat pays taxes in Spain, they can potentially claim a credit for these taxes on their US tax return using Form 1116. This helps prevent double taxation on the same income.
- FBAR (FinCEN Form 114): US persons with financial interests in or signature authority over foreign financial accounts must report these accounts if their aggregate value exceeds a certain threshold.
- Form 8938 (Statement of Specified Foreign Financial Assets): This form is used to report specified foreign financial assets if their value exceeds certain limits. It's essential for expats with significant financial assets abroad.
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When are Spain's taxes due?
For US expatriates residing in Spain, understanding the local tax calendar is crucial to ensure timely compliance and avoid potential penalties. Here's a breakdown of the key dates:
- Personal Income Tax (IRPF): The general deadline for filing the annual personal income tax return in Spain is between April 1 and June 30. This period is for the previous year's income, similar to the US tax system which operates on a calendar-year basis.
- Quarterly Filings: For those who are self-employed or run a business in Spain, there are quarterly tax filing obligations. These typically fall at the end of April, July, October, and January.
- Wealth Tax: If applicable, the wealth tax return in Spain is filed simultaneously with the personal income tax return, meaning the deadline is between April 1 and June 30.
- Non-Resident Income Tax: For non-residents earning income in Spain, the deadline for filing is December 31 of the year following the tax year.
Spain tax forms for US expats
Here are some of the primary tax forms relevant to US expats in Spain:
- Form 100: This is the standard form for filing personal income tax (IRPF) in Spain. It covers all types of income, deductions, and credits.
- Form 210: Used by non-residents to declare income earned in Spain. This form is especially relevant for US expats who might have rental income or other sources of income in Spain but are not considered tax residents.
- Form 714: This form is for declaring assets and rights located outside of Spain. It's a crucial form for US expats, especially those with significant assets or financial interests in the US or other countries.
- Form 720: A declaration of overseas assets. US expats with assets exceeding certain thresholds outside of Spain, including bank accounts, real estate, or investments, must file this form.
- Form Modelo 390: For those who are self-employed or have a business, this is the annual summary of VAT (Value Added Tax) declarations.
Additional information you should know
The concept of trusts in Spain
Trusts, a common estate planning tool in the US, are not as prevalent in Spain. However, they are recognized, primarily due to Spain's commitment to international agreements. Key points to consider include:
- Recognition: While Spain doesn't have a direct equivalent to the Anglo-Saxon trust, Spanish law does recognize foreign trusts under international private law principles.
- Taxation: Trusts can pose complex tax implications for US expats in Spain. Beneficiaries of a trust, whether discretionary or fixed, may be subject to taxation in Spain based on the income derived from the trust. It's essential to consult with a tax pro familiar with both US and Spanish tax systems to navigate these complexities.
Work and residence permits for Spain
For US citizens eyeing a move to Spain, understanding the work and residence permit landscape is crucial:
- Work Permits: Non-EU/EEA citizens, including Americans, need a work permit to legally work in Spain. This is typically sponsored by a Spanish employer. The process involves obtaining authorization from the Spanish Ministry of Labor and then applying for a visa at the Spanish consulate in the US.
- Residence Permits: There are various types of residence permits, including non-lucrative (for those not intending to work), retirement, and entrepreneur visas. Each has specific requirements concerning health insurance, income, and other criteria.
- Golden Visa: Spain also offers a "Golden Visa" program, allowing non-EU investors to obtain residency by making significant investments in Spanish real estate or businesses.
Exchange control regulations
Spain, as a member of the European Union, adheres to the EU's principles of free movement of capital. However, there are specific regulations to note:
- Reporting Obligations: While there are no restrictions on transferring money into or out of Spain, transactions exceeding 10,000 EUR must be reported to the Spanish authorities.
- Foreign Investments: Non-residents investing in Spanish companies, real estate, or other assets must declare these investments to the Spanish Directorate of Commerce for statistical purposes.
Beckham law
Spain offers a unique tax regime for incoming expatriates, often referred to as the "Beckham Law" (named after the famous footballer David Beckham, an early beneficiary). Key features include:
- Scope: New residents in Spain, who haven't been tax residents in the country during the previous ten years, can opt for this regime.
- Taxation: Beneficiaries are taxed as non-residents, meaning they're only taxed on Spanish-sourced income. This can result in significant tax savings, especially for those with global income sources.
- Duration: The special regime applies for six tax years, after which individuals transition to the standard tax resident regime.