Understand when and where income tax should be paid…
How Income is Taxed
Understand when and where income tax should be paid…
Income (including capital gains) is split into ‘general income’ (renta general) and ‘savings income’ (renta del ahorro). After being calculated according to the rules for each particular type of income within each category, the total of ‘general’ and ‘savings’ is termed the base imponible(or taxable base). After any deductions and allowances it is then known as the base liquidable(net taxable base).
Residents are taxed on their worldwide savings income and capital gains at progressive tax rates and non-residents on their Spanish savings income and gains at a fixed rate.
Savings income includes:
- interest income
- income from life assurance contracts
- purchased annuity income
- income from capital gains on the sale/transfer of assets.
If you are a Spanish resident, the savings income and capital gains rates for 2017 are:
|TAX BAND||TAX RATE|
|€0 – 6,000||19%|
|€6,000 – €50,000||21%|
If you are a non-resident, you pay taxes on savings income and capital gains at a flat rate of 19% (subject to tax treaty provisions) on your Spanish source income only.
If you are a Spanish resident, you are taxed on your worldwide ‘general’ income at progressive scale rates. Anything not categorised as savings income is included here, including:
- all earned income (i.e. salary, self-employment and pension income)
- rental income • notional rental income
- income from royalties
- gains not made on the sale/transfer of assets (for example, from gambling and lottery).
The income tax scale rates are made up of the ‘state tax rates’ and the ‘regional tax rates’ (which are set independently by each particular Spanish autonomous community). Generally, for 2017 general income, the tax rates start at 19% for income under €12,450 and rise up to 45% for income over €60,000. However, the rates can vary according to the regionaltax rates that apply in that autonomous community, so income tax rates in your area may be slightly higher or lower than this. If you are a non-resident, you pay taxes only on your Spanish source incomeand capital gains at the flat rate of 19% if you are resident in another EU/EEA (European Union/European Economic Area) country. Residents outside the EU/EEA will pay 24% instead.
Deductions and Allowances
Deductions and allowances are generally available for Spanish residents. The ‘Mínimo Personal y Familiar’ is similar to the UK personal allowance. Any allowance not used against the general income can be set against the savings income. The basic Spanish personal allowance for 2017is €5,550 per person. For joint tax returns the allowance given to the first spouse is €5,550 plus €3,400 for the second spouse. The basic allowance is increased by €1,150 for someone aged 65 or more (so €6,700 in total) and by a further €1,400 for someone aged 75 or more (€8,100 in total). Additional allowances are made for dependent family members, ranging from €1,150 to €4,500 according to the age and number of dependents. There are also extra allowances of at least €3,000 for dependants with a disability. Note that the allowances are not given as a deduction against income (as in the UK), but instead are given as a tax credit against the total tax payable. The amount of credit is calculated by taking the total personal allowance and multiplying this by the scale rates of tax, starting with the lowest rate first. It is then deducted from the taxpayer’s total tax payable for the year. This has the effect of relieving tax not at the taxpayer’s marginal rate, but first at the lowest rate of around 19%, and then at the higher rates where applicable.
For Spanish residents, a reduction of 60% is available against the net rental income before tax is payable, and includes any lettings income from outside Spain but not short-term holiday lets.
The net rental income is the amount of rent due after deducting usual day-to-day running costs for the period in question, including amongst others, local municipal taxes such as IBI tax (ImpuestosobreBienesInmuebles), repairs and maintenance, managing agents’ fees and commissions, house insurance, interest on loans for purchase or improvement, and depreciation of 3% per year of the cost of the property (excluding the land value).
If you are a non-resident, you are taxed on the net rental income from your Spanish property after expenses at the flat rate of 19%. This is only applicable if you are an EU/EEA resident. For other non-residentsoutside the EU/EEA, the flat tax rate is 24% on gross income without any deductions for expenses or interest costs.
If you own a property in Spain that is not your main home – which will be deemed the case if you are a non-resident – a purely notional or theoretical rental income is deemed to arise for periods where the property is not actually let to a third party. This is called Imputación de rentasinmobiliarias and it is generally based on 1.1% of the official value (valorcatastral) of the property as shown in the IBI notice for that year, whether you are resident in Spain or not. Thisrate goes up to 2% of the valorcatastralif it has not been revised within the previous ten years. Where such a property is empty for part of the year and rented for part of the year, you calculate the notional income for the part of the year the property is empty. For Spanish residents this income will be added to their general income and taxed at the corresponding progressive rates whereas for non-residents it will be taxed at 19% or 24% depending on where are they residents (EU/EEA or not).
If you are a Spanish resident and physically work in the UK for a non-Spanish employer, your income will usually be taxed in the UK.
If all or some of the employment is carried out in Spain, you will be subject to tax in Spain on the proportion of the employment income relating to the work performed in Spain. So a resident of Spain working for and paid by a UK employer will usually be taxed in the UK on employment income relating to duties performed in the UK. If no duties are performed in the UK, then the earnings cannot be subject to UK tax. If all duties are performed in Spain, the earnings will be subject to tax in Spain.
If you perform duties in the UK for a Spanish employer and spend fewer than 183 days in the UK during the UK tax year, you will only pay income tax in Spain. Social Security contributions will also be payable on employment income. These are usually paid to one country only, based on total earnings. The country where they are payable will depend on various factors, including where the work is performed and where the individual is habitually resident.
Self-employment income is subject to tax at the progressive scale rates of tax in Spain. The amount taken into account for tax is the net profit – the gross income less the expenses of the business. All self-employed traders and businesses must register for VAT (IVA) in Spain regardless of turnover. The standard rate of Spanish IVA is 21% although certain services are exempt or subject to reduced rates. Social Security contributions are also payable, and these are tax deductible in Spain. If you are self-employed, a minimum contribution of around €285per month is payable, regardless of profits.
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual must take personalised advice.
Blevins Franks are the leading international tax and wealth management advisers to UK nationals living in Europe. Visit www.blevinsfranks.com