Tax rebates in Spain for pensioners and expatriates

Posted on Posted in Tax

It is expected that in 2015 the Spanish Law would be amended to grant a much better tax treatment to foreign expatriates coming to Spain as well as pensioners and foreign self-employed individuals coming to Spain.

The current Personal Income Tax Law already has a special tax system for foreign employees hired by Spanish companies or seconded by their employers to a Spanish subsidiary of the group.  The original goal of this tax regime was to attract highly qualified and talented workers by giving them a soft tax treatment. Basically, the regime consist in taxing tax payers coming to Spain only on their Spanish source income at a flat tax rate of 24, 75 % (in 2014). In other words, they are treated as if they were nonresident in Spain for tax purposes. Unfortunately, the tax system had little success, except for top-level football players. In fact many call this law the “Beckam Law”, because he is supposed to be the first one to enjoy from this low tax treatment.

The reason of this failure must be attributed to the stringent requirements established in the law for the special tax status to be applicable. Firstly, it only applies to employees coming to Spain, but is not applicable to other types of tax payers, namely, pensioners and self-employed individuals.  One of the most important amendments proposed by a group of tax experts appointed by the government is to broaden the scope of the tax regime to be applied also to these tax payers.

Secondly, if the tax payer is an employee, he is not currently allowed to apply the special tax regime if he earns foreign source employment income representing 15 % or more of the total income.  This threshold would also be removed or substantially increased.

Finally, the experts have proposed to eliminate the yearly threshold of EUR 600.000 currently in force. Now employees earning more than this amount do not qualify for the tax regime. This limit was introduced by the socialist government in order to exclude top football players from benefiting from this low tax system, but also has the side effect of preventing highly talented top managers moving to Spain.

The amendments proposed also aim to lower the overall tax burden of expatriates and pensioners coming to Spain by declaring exempt several taxes. For instance, the deemed income on urban real property (2% of the cadastral value of the property) would be eliminated. Likewise, inheritance of the permanent home of the tax payers enjoying this tax regime would be declared exempt from the Spanish Inheritance Tax.

Nobody knows if the government would finally introduce all the suggestions proposed by the group of tax experts, but the international experience (Portugal, France, Italy) clearly shows that lowering the taxes for foreign individuals choosing Spain to live and work, is a good idea and, in the long-term, increases the overall tax revenue.