The tax system is an important part of the economic life of any country, and in Spain it matters a great deal. Spanish taxes are considered among the highest in the world, yet this does not frighten off or deter foreign investors and entrepreneurs. The reason is that, for all its complexity and many levels, the Spanish tax system is transparent and non-discriminatory, allowing residents and non-residents to live and do business in the country on equal terms.
The Spanish tax system is fairly young. The foundations for unifying the tax structure of the whole country were laid by the reform of 1845. In 1977, after the fall of the Franco regime, another tax reform adapted the system to modern realities and needs. Since then the system has been modernised continuously to keep pace with fast-changing economic conditions and the integration requirements of the European Union. In 1992 Spain created a single tax authority, the State Tax Administration Agency (Agencia Estatal de Administración Tributaria), which took over the management of tax processes.
Administrative divisions and levels of taxation in Spain
Spain has a complex administrative and territorial structure: the country is divided into 17 autonomous communities, or “autonomías”, each with a certain degree of political and financial autonomy. These communities are in turn divided into 50 provinces, plus there are two autonomous enclave cities, Melilla and Ceuta, located on the African continent. The provinces are divided into comarcas (districts that group several municipalities), and in total include more than 8,000 municipalities.
Within this structure, taxes in Spain are levied at three levels: national, regional and local. Regions and municipalities have some freedom in setting tax rates, allowances and reliefs. Taxes collected locally are passed on to budgets at different levels, in full or in part. Besides the main taxes, there is also a long list of duties and charges.
The main taxes are:
- National level: personal income tax (IRPF), non-resident income tax (IRNR), value added tax (IVA), wealth tax (IP), inheritance and gift tax (ISD) and corporation tax (IS).
- Regional level (autonomous communities): tax on transfers of movable and immovable property for consideration (TPO), capital duty on company transactions (OS) and stamp duty (AJD).
- Local level (municipalities): property tax (IBI), vehicle tax (IVTM), business activity tax (IAE) and tax on the increase in land value (IIVTNU or Plusvalía).
Taxes in Spain are also divided by their nature into:
- Direct and indirect;
- Those that apply to tax residents and to non-residents;
- Those that apply to individuals and to legal entities.
Administrative and tax residence in Spain
In Spain the terms are often confused. A residence permit is called residencia in Spanish, so all foreigners legally in the country are often called residents. Yet far from all of them have a residence permit. Students, for example, are in Spain on a study visa, which is a permit to stay (estancia), not a residence permit. Digital nomads and Golden Visa holders are also a separate case, as their status is governed by special legal rules. But even foreign nationals who hold a temporary residence permit (residencia temporal) or a long-term residence permit (residencia de larga duración) do not automatically become tax residents of the country.
A foreign national becomes a tax resident of Spain if at least one of the following conditions is met (Art. 6 of the Non-Resident Income Tax Act):
- Spending more than 183 days in the country in a calendar year. When counting this period, all temporary absences are included, unless the person can prove tax residence in another country. Note that for countries or territories classed as tax havens, the Spanish tax authorities may require proof of at least 183 days a year spent in that territory. Time spent in Spain to fulfil obligations arising from cultural or humanitarian cooperation agreements with Spanish public institutions, carried out free of charge, is not counted when determining residence.
- Main place of residence or centre of economic interests. If the person’s main place of life or main base of economic interests is in Spain, they are considered a tax resident. This can be established through direct ownership and management of assets or through indirect interests.
- Family ties. If the taxpayer’s legal spouse and dependent minor children live permanently in Spain, the taxpayer is automatically treated as a tax resident unless they prove otherwise.
In any case, you can be a tax resident of only one country. If necessary, your tax residence status can be confirmed with a certificate from the tax authorities. In Spain, if you have a digital certificate, you can get this certificate instantly in your personal area on the tax agency’s website.
The tax system in Spain: the main taxes
Let us look at all the main taxes that people living in Spain, as well as entrepreneurs and business owners, have to deal with.
Taxes on personal income in Spain
Personal income tax (IRPF – Impuesto sobre la Renta de las Personas Físicas)
This tax applies to the income of resident individuals from employment, renting out property, benefits, grants, pensions, lottery prizes, bank interest and so on. Spain uses a progressive scale: at national level the rates range from 19 to 47%. At the same time, the autonomous communities have the right to set their own rates, so they can vary by a few points from one region to another.
Each region has a long list of income tax deductions and reliefs. On a low income there is no obligation to file a return. From 2024 the annual tax return can only be filed electronically. Spouses may choose to file separate returns or a joint return, and a tax adviser will help you choose the better option.
Non-resident income tax (IRNR – Impuesto sobre la Renta de No Residentes)
Foreign nationals who are not tax residents of Spain but earn income here pay IRNR. This includes, for example, income from renting out property. In addition, if a foreigner owns property in Spain, they are taxed on deemed income from it even if it is not rented out (calculated from the cadastral value). The main tax rates are 19% for citizens of other EU member states and 24% for citizens of non-EU countries. The tax is also charged on dividends, interest, pensions, gains from securities transactions, profits from reinsurance transactions and so on, at rates from 1.5 to 40%.
The tax return is filed once a year or, if the property is rented out, every quarter. The return is filed electronically.
Taxes on property and other assets
Property tax (IBI – Impuesto sobre bienes inmuebles)
An annual tax paid by individuals and legal entities who own property. It is calculated from the cadastral value, and the tax rates are set by each municipality.
Wealth tax (IP – Impuesto sobre el Patrimonio)
It is also known as a tax on capital or a tax on assets. It is paid only by individuals who live permanently in Spain or own assets in the country. Under the national rules, the tax-free allowance is set at €700,000. However, the regions have the right to set their own limits. At present the tax-free allowance in the different autonomous communities ranges from €400,000 to €800,000.
The tax is calculated on the net value of all assets, both tangible and intangible. There is also a whole list of tax reliefs and deductions. Wealth tax is calculated on a progressive scale. The national rates range from 0.2 to 3.5%, and the rates of autonomous communities that use their own scale differ by a few points.
Tax on the increase in land value (IIVTNU – Impuesto sobre el Incremento del Valor de los Terrenos de Naturaleza Urbana or Plusvalía)
The taxpayers are sellers of property and beneficiaries who have received property as a gift or inherited it. Plusvalía is a municipal tax whose rates are set by each municipality. There are two methods of calculating the tax: the objective method and the method based on the actual gain. The objective method is used by default; it takes the cadastral value, applies multiplying coefficients to it and, at the last stage of the calculation, the rates in force in the municipality. The method based on the actual gain also takes into account the profit made on the transaction, but you must notify the notary that you intend to use it when the transaction is completed.
Tax on transfers of movable and immovable property for consideration (TPO – Impuesto sobre las Transmisiones Patrimoniales Onerosas)
This tax applies, for example, to purchases and sales of resale property and second-hand vehicles. The rates are set by the autonomous communities: from 4% on the transfer of ownership of movable property and from 6% on immovable property. On average, rates across the country range from 4 to 11%. This tax is always paid by the buyer.
Stamp duty (AJD – Impuesto sobre los Actos Jurídicos Documentados)
Stamp duty in Spain is charged and paid when notarial documents, commercial documents and administrative documents are executed. Different types of rate may apply in different cases: a fixed rate of 0.15 cents per page, or a progressive rate from 0.5 to 1.5%. The progressive rates are set by the autonomous communities.
Stamp duty is fully compatible with VAT and only partly compatible with the tax on transfers for consideration. For example, when buying a new-build property from a developer, the buyer must pay VAT, stamp duty at the progressive rate calculated on the property price, and stamp duty at the fixed rate for the notarial deed executed. When buying a resale property, on the other hand, where TPO is charged and paid instead of VAT, stamp duty is charged only at the fixed rate, according to the number of pages of the notarial title deed.
Inheritance and gift tax (ISD – Impuesto sobre Sucesiones y Donaciones)
This tax is essentially a national tax and is regulated at national level as far as its main provisions are concerned. However, the right to collect it has been devolved to the regions, and tax-free allowances, reliefs and deductions are also set at regional level. The tax is paid by heirs and beneficiaries.
Vehicle tax (IVTM – Impuesto sobre vehículos de tracción mecánica)
An annual municipal tax paid by owners of vehicles registered in Spain. The tax is calculated in different ways: for cars by engine power, for lorries by maximum authorised mass, for motorcycles by engine capacity and for buses by number of seats.
Business taxes in Spain
Value added tax (IVA – Impuesto sobre el Valor Añadido)
In Spain, VAT applies to goods and services sold or supplied in the country, as well as to imports of goods from other countries. The exceptions are the Canary Islands, where the local IGIC tax applies, and Ceuta and Melilla, where IPSI applies. The standard rate of VAT in Spain is 21%, and there are also reduced rates of 10% and 4%, plus a zero rate. The tax is paid by the end consumer, but the duty to account for and declare it lies with the entrepreneurs and legal entities that sell goods and provide services.
Self-employed people in Spain who work in retail and neither make nor alter the goods they sell (selling ready-made clothes, shoes, food, cosmetics and so on) must use a special VAT scheme, the Recargo de Equivalencia, which involves an additional tax surcharge of 0.75 to 5.2%.
Capital duty on company transactions (OS – Impuesto sobre las Operaciones Societarias)
This tax applies to transactions involving the share capital of legal entities, including their incorporation, increases or reductions of share capital, and liquidation, or a change of registered office or head office address. The tax rate is 1%.
Corporation tax (IS – Impuesto de Sociedades)
In Spain the main payers of corporation tax are public limited companies (S.A.) and limited companies (S.L. and S.L.U.), but the tax obligations also extend to many associations, foundations and other entities, including those without legal personality. The tax period is the calendar year; new companies begin their first accounting period from the date of incorporation. The tax is paid in July of the year following the reporting year.
The tax base is calculated by determining the net income for the year, taking into account any losses from previous years and statutory adjustments. Once the relevant tax rate has been applied, the tax liability is determined, and various deductions and reliefs may then be applied to it.
The standard rate of corporation tax in Spain is 25%, but there are also specific rates: 23% for small and medium-sized businesses, 15% for new companies in their first two profitable years, 20% for cooperatives, 1% for investment funds and companies, 25% for insurance companies, credit institutions and political parties, and 30% for banks. No tax is charged when a company makes a loss, which supports the financial stability of businesses in difficult periods.
Business activity tax (IAE – Impuesto sobre Actividades Económicas)
In Spain all entrepreneurs and companies must register on the business activity tax register, but only those with an annual turnover of more than €1 million have to pay it. In other words, small businesses do not pay this tax at all. What is more, in their first two years of activity new businesses are exempt from this tax even if their turnover exceeds the threshold, which makes it easier for them to get started.
For medium-sized and large companies with turnover above the threshold, business activity tax is charged at municipal level, so the rates can differ from one town to another.
Social security contributions of the self-employed (Cuota de autónomos)
The social security contributions that self-employed people pay every month are not a tax. Even so, you should take them into account in tax planning, as they are a considerable burden. Contributions must be paid both by independent self-employed people and by company directors registered as self-employed. Depending on the declared base and income level, contributions range from €225 to €530 a month.
In Spain, new self-employed people can take advantage of a reduced rate when they register. For the first 12 months of activity they pay a flat contribution of €80 a month. If their net income does not exceed the minimum wage (€1,134 a month in 2024), the reduced period can be extended for another 12 months.
If you have any questions about taxation in Spain, contact the specialists at “Alegria” for advice and help with tax planning and optimisation.
