The personal income tax reform in Spain for 2015

The Spanish tax system overhaul planned by the group of experts entrusted by the Spanish Government greatly affects the structure of the Personal Income Tax, which affects individuals resident in Spain for tax purposes. These changes are due to come into force in January 2015, although the Government has noted to the media that the report of the group of experts is not binding and that the changes would be timed according to the macro economic scenario.

Following the same pattern than with the Corporation Income Tax (read our post: the reform of the Corporate Income Tax in Spain) the experts propose to broaden the taxable base followed by a substantial reduction of the tax rates. Many exemptions, allowances, reliefs and tax credits would be eliminated; to prevent an undesirable increase in the tax payable, the tax rates would be reduced, from a current range of 25 % to 56 %, to a more reasonable 20 % – 50 % range.

However, the basic feature of the Spanish Personal Income Tax shall remain untouched. Spain has a so-called dual system, whereby the earnings are allocated in two big baskets: the earned income and the savings income. The first basket, considered the general taxable base, comprises the income from employment and self-employment. The savings basket include the income derived from financial investments (dividends, interest…) and capital gains from any kind of assets, including business assets of self-employed people, but excluding short term capital gains. As explained above, the general taxable base is taxed in brackets from 25 % to 56 %. On the contrary, the savings basket is taxed at a reduced tax rate of 21 % to 27 %.

Regarding the allocation of the different sources of income to the two baskets, a few but relevant changes are proposed. I would highlight following changes:

  • Benefits from pension funds, which are currently treated as deferred salary and therefore included in the general taxable base, would be shifted to the savings baskets. I personally doubt that this measure is ever put into practice, because it would have a tremendous impact on the tax revenue.
  • Rents from immovable property (including deemed income on non-leased property) would also be included in the savings basket. Now this income is oddly included in the general taxable base, which implies a clear discrimination compared with other investments.
  • Short term capital gains (less than one year) would be re – assigned to the savings baskets.
  • Gains and losses from investments could be freely offset. Now there are severe restrictions to offset capital losses against standard savings income.

There are a few measures which can have a significant tax impact in tax payers: for instance, many exemptions for employment income would be eliminated: severance payments and most exempted fringe benefit would be taxable in the future. Other very important measure is the elimination of the tapper relief. This relief has the effect of reducing the taxable capital gain for assets acquired before 1988. Therefore, selling a property in 2014 could be an interesting move.