The Spanish Personal Income Tax is a tax which taxes all earnings of individuals who are resident in Spain for tax purposes. Nonresident individuals having Spanish source income are not taxed under this tax, but under the Nonresidents Income Tax.
The Spanish Income Tax Overview
A tax payer is deemed to be resident in Spain for tax purposes if he is present in the Spanish territory from a period exceeding 183 days in the fiscal year (which is the same as the calendar year) or when the centre of his vital interest is located in Spain. In this respect, there is a legal presumption that the tax payer has his centre of vital interest in Spain when his spouse and minor children live in Spain. The only way to override this presumption is, in practical terms, to have a certificate issued by the competent tax authority of other State stating that the tax payer is resident there for tax purposes.
One feature of the Spanish tax residence rules is that during one single fiscal year a tax payer cannot be resident for one period and nonresident for other period. That is, during a calendar year, the tax payer is either resident or nonresident, but cannot be both. Therefore, if an alien moves to Spain during the first semester of any year, he would be deemed to be resident for the whole year, and taxed as a resident for the foreign earnings corresponding to the period prior to the transfer. This can cause double taxation. Therefore, a careful consideration to the timing of the move is highly recommended.
The sources of earnings are classified in the following categories:
- Employment income
- Self-employment income
- Savings and other investment income, such interest, dividends, rental income and capital gains.
Employment related income accounts for the 80 % of the revenue of this tax. Employment related income includes all wages, salaries and perks received by an individual as compensation under a labor contract. Salaries are taxable regardless they are paid in cash or as non-cash payments, often referred as payments in kind or fringe benefits.
Together with wages and salaries, all replacement earnings payments are taxable as employment related income, such as sick pay, maternity and paternity pays and the like.
One of the main taxable items under this category are the so-called deferred salaries. These are the earnings arising from a former job which are cashed upon reaching the pensionable age, such as Social Security retirement pensions, state pensions, widow’s pensions and benefits from pension funds schemes and some life insurance contracts.
Finally, the Law includes as employment related income a miscellaneous of items which in some cases have an unclear link to a current or previous job. Among them, there are Director’s fees, maintenance payments received from an ex-spouse and jobseeker’s allowance.
Below there are a few items which need further comments:
Contributions to regulated pension funds, either occupational or personal, get a tax relief. This means that the employers and, if is the case, the personal contributions of the employee are deducted from the taxable income. Only what is left is taxable.
The tax relief for contributions to registered pension funds schemes is limited to EUR 10.000 or 30 % of the tax payer’s earnings (salaries and self-employed income), the lower. For tax payers over 50 years old, said limits are increased to EUR 12.500 per year or 50 % of their earnings, respectively.
It is noteworthy saying that the tax relief is also applicable to contributions to foreign occupational registered pension funds that comply with the requirements of EC Directive 2003/41 /CE, as long as they met the following criteria:
- That the contributions are attributed for tax purposes to the employees
- That the sponsoring entity (the employer) is a separate entity from the pension fund
- That the benefits of the pension scheme are irrevocably transferred to the employees
- That the sponsoring entity does not retain any interest in the pension scheme assets
- That the benefits of the pension fund can only be awarded to the beneficiaries upon the occurrence of the following events: retirement, death, incapacity, serious illness or long term unemployment.
Life and disability Insurance contracts
In case that the employer chose to cover the risks of (death, incapacity, or disability) by means of a collective insurance contract the same rules apply. However, the premiums paid to insure the employees only for occupational incidents are not taxable.
Premiums paid to insurance companies to cover medical expenses of the employees or their spouse and dependants are not taxable, providing they do not exceed EUR 500 per year and beneficiary.
Studies of the employee’s dependants
The amounts paid by the employers to educational centers for primary, secondary and vocational studies of the employee’s dependants are not taxable.
Mileage and fuel relief
The payments to the employees who use their own vehicles for business purposes, to compensate them for the cost involved, is not taxable to the limit of EUR 0.19 per Km.
Meals and hotels
The compensation paid to employees for travel and subsistence expenses incurred for business purposes is not taxable as long as they are reimbursed for the actual cost. In the case of meals, the tax free amount is limited to EUR 26,67 per meal if the trip is within the Spanish territory or EUR 48,08 if abroad. Needless to say that if the company pays for these cost (for example using the company’s credit card ) all the amounts paid to the employee would be taxable, since there will not be any reimbursement of cost but and additional perk paid by the employer.
Foreign tax relief
Employees working fully or partially abroad for nonresident companies enjoy a tax exemption of the salaries received therefrom with a limit of EUR 60.000, as long as the salaries are taxed in the country of source. If the State where the work is performed has a Tax Treaty with Spain, this requirement is deemed to be fulfilled.
The compensation in excess of EUR 60.000 would be taxable, but could enjoy the foreign tax credit relief, that is, the tax payer could deduct the tax paid abroad on that salary with the limit of the tax payable in Spain.
Long term compensation schemes relief
Long term (more than two years) compensation payments enjoy a tax exemption of 40 % with the limit of EUR 120.000 per year. This tax relief typically applies to performance driven bonuses paid to high management. For the tax relief to apply, several conditions must be met.
The same tax treatment is awarded to other payments to employees, namely layoff or severance payments in case of unfair dismissal.
Allowances and deductions
The taxable income is the gross income received by the employee minus certain expenses. Actually, the only relevant deductible expense is the contribution of the employee to the Social Security Scheme and Trade Unions membership fees. Also litigation expenses in respect to the job can be deducted with the limit of Eur 300 per year.
Apart from that, there are a few allowances which are worth mentioning:
Employment income enjoys an annual general reduction of EUR 2.625 in 2013. Low income tax payers can enjoy a higher allowance with a maximum of EUR 4.080.
Personal allowance: For 2013, the personal allowance is 5.151 EUR. Aged tax payers enjoy a higher personal allowance.
Child allowance: tax payers can enjoy a child allowance for each dependant child under 25 years old, as long as they do not earn income over EUR 8.000 per year. The amount varies: 1.836 EUR for the first child, 2.040 EUR for the second, 3.672 EUR for the third and 4.182 EUR for the fourth and the rest. Note that these amounts must be divided by the two parents, unless the children only live with one of their parents, as typically occurs in divorced couples.
Maintenance payments to ex – spouses: these payments can be deducted from the taxable base as long as they derive from a Court decision.
For the tax year 2013, the withholding tax rates are as follows EUR: