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The tax system in Spain

Every country in Europe has its own fiscal system. What might be tax efficient in the jurisdiction of origin may not necessarily hold true in the adopted country. Often in the case of non-indigenous product or structure, particularly where no precedent has been set in case law, it is a question of interpretation in order to determine “best fit”.

Complicating further the situation in Spain, unless they have the knowledge, experience and language skills, it is unlikely without prompting by either a client or an advisor that a domestically trained accountant or fiscal lawyer will be able to assess the correct treatment of a product or structure from a completely different fiscal regime.

Residency and Domicile Status

Residency determines the authority to which an individual will pay taxes during their lifetime, whilst the UK concept of domicile becomes relevant on the event of death.

Double Taxation Treaties

These exist between many countries worldwide in order to prevent individuals paying tax twice on the same income and/or assets.

Many people living permanently in Spain believe that if they pay tax at source in the UK e.g., pension income, they don't have to bother with Spanish tax. This assumption is incorrect. In certain cases the UK does retain taxation rights (if there are UK business interests for example), but in general pension income should be received gross (unless it is from the public purse). The P85/FD9 Process is the mechanism to achieve this. The P85 tells HM Revenue and Customs that an individual is about to leave or has already left the country and triggers the sending out of form FD9. Submission of the FD9 will ensures that tax is paid only in the country of physical presence and makes tax affairs much easier. Registration is also required with the Hacienda. Note that Spanish protocol varies depending on the location of the local tax office.

The fiscal system

Spanish income tax (IRPF) liability is based very much on personal circumstances. The “minimo vital” of €5.050 is just the starting point. There are additional allowances if you are over 65, are disabled or a carer for example; there are also allowances for certain life assurance and pension premiums, interest paid on mortgages, etc. Note that although some UK benefits e.g., invalidity, are taxable in Spain, these are at a greatly reduced rate. Spanish fiscal law also has some quirky rules regarding the number of sources of income and as a result, many individuals end up paying less than they would having tax deducted at source from the UK.

The concept of a flat rate savings tax (IAT) sounds pretty straight forward. However, the Spanish fiscal system is completely different from that in the UK so making assumptions or relying on a UK advisor often leads to errors in tax planning. For example, PEPS, TESSAs and ISAs lose their tax free status in Spain. IAT is levied at 18% on what the Hacienda deems to be savings and there are some interesting exceptions.

Certain types of insurance product have special treatment providing they comply with the Brussels Council Directive 85/611/EEC of 20th December and/or are registered with the Spanish SEC for the purposes of being marketed by Spanish resident entities.

Whether a lump sum investment can be treated as a “systematic savings plan” i.e., one which is taken out with the intention of drawing a regular income at some point in the future; whether it is treated as a simple “unit linked collective investment”; or whether it is looked upon as a single premium whole of life assurance; these decisions merit professional attention and depend on precise policy conditions as well as the finer points of Spanish fiscal law.

At the very worst a life policy will result in tax deferral; at best it will roll up tax free during the capitalisation period i.e., when income is not being taken and attract further tax breaks when a regular income stream is triggered depending on the age of the policy holder at the time.

There are two types of capital gains taxes levied in Spain – one imposed by the Hacienda called Patrimonio and the other by the municipal town hall called Plus Valía. In simple terms both are calculated on the difference between the price declared when the property is purchased and when it is sold. Allowances, called co-efficients, are applied to take into consideration the effects of inflation.

Tax breaks

Tax breaks using the habitual residence rule apply for Spanish taxpayers under certain conditions. Whilst Patromonio is levied at 18%, rates of Plus Valía depend on individual Town Halls. It is usually waived if you sell within a 12 month period.

It is difficult to be concise in regards to Spanish inheritance tax (ISSD) which requires an article all of its own. The relationship of the deceased to the beneficiary and the amount received have a bearing on the amount of tax liability as this tax is applied to the individual and not the estate as in the UK model. Local rules operate and a sliding scale ranging from 7.95% to34% applies.

Should an individual have any ties at all to the UK, on the event of death UK domicile rules apply and the worldwide estate will be assessed according to HMRC regulations. Any Spanish inheritance tax paid is deducted using “unilateral relief”