Spanish income tax law
Introduction to Spanish income tax law
Spain is a beautiful country that attracts many foreigners every year. If you are planning to live in Spain, it is essential to understand the country’s income tax laws to avoid any legal issues. Like most countries, Spain has a progressive income tax system, meaning the more you earn, the more you pay taxes. The Spanish income tax rate can be as high as 45%, depending on your income level.
Existing Income Taxes in Spain
The tax rate on employment income is progressive and varies depending on the income earned. There is a split between state and regional taxes, which comprise the total income tax rate.
For the tax year 2023, the tax rates for employment income are shown below.
Capital Gains Taxes in Spain
If an individual is a tax resident in Spain, they must report their worldwide capital gains in their Spanish tax return, including any gains made outside of Spain. The capital gains tax rate in Spain is generally 19% for gains up to €6,000, 21% for gains between €6,000 and €50,000, and 23% for gains over €50,000. Any assets that make more than €200,000 in gains have 26%. Non-residents have a capital gains tax of 19%.
What is Beckham’s Law?
The Beckham Law, also known as the Special Tax Regime for Impatriates, has been a tax law in Spain since 2005. The law is named after the famous football player David Beckham, who used it when he moved to Spain to play for Real Madrid. The law allows highly skilled foreign workers, executives, and professionals who move to Spain to pay a flat tax rate of 24% on their income instead of the standard Spanish income tax rate.
Who is eligible to use Beckham’s law while residing in Spain?
An individual must meet specific requirements to be eligible to use Beckham’s law while residing in Spain. First, they must be a foreigner who has not been a Spanish tax resident for the previous ten years.
Additionally, they must be hired by a Spanish company or be self-employed in Spain. The individual must also be a high-skilled worker, executive, or professional, earning more than €600,000 annually.
What are the legal requirements for using Beckham’s law?
To use Beckham’s law, an individual must apply for the special tax regime within six months of becoming a Spanish tax resident. The application must be made to the Spanish tax authorities and accompanied by specific documentation, including proof of employment or self-employment in Spain. The individual must also provide evidence of their qualifications and expertise that make them eligible for the special tax regime.
Can Golden Visa holders use Beckham’s law?
Golden Visa holders, who have invested in Spanish property, are not eligible to use Beckham’s law. The law only applies to foreign workers who are employed or self-employed in Spain and meet the eligibility criteria.
What are the benefits of Beckham’s law?
The main benefit of Beckham’s law is that it allows high-income earners to pay a lower flat tax rate of 24% instead of the standard Spanish income tax rate, which can be as high as 47%. This can result in significant tax savings for those eligible to use the law.
A Practical Example of Beckhams Law
Assuming the individual is eligible for the Beckham Law and chooses to apply it, their taxable income would be limited to the income earned in Spain, which in this case, let’s say, is €100,000.
Under the Beckham Law, the applicable tax rate on the taxable income would be a flat rate of 24%, resulting in a tax liability of €24,000.
If the individual were subject to standard Spanish income tax rules, their taxable income would be the full €100,000 earned. The tax liability would be calculated based on the progressive tax rates applicable in Spain, as follows:
- Income up to €12,450: 19% tax rate, resulting in a tax liability of €2,365.50 (€12,450 x 19%);
- Income between €12,450 and €20,200: 24% tax rate, resulting in a tax liability of €1,590 (6,750 x 24%);
- Income between €20,200 and €35,200: 30% tax rate, resulting in a tax liability of €4,260 (€15,000 x 28.5%);
- Income between €35,200 and €60,000: 37% tax rate, resulting in a tax liability of €9,940 (25,800 x 38.5%); and
- Income between €60,000 and €300,000: 45% tax rate, resulting in a tax liability of €18,000 (40,000 x 45%).
The total tax liability under the standard Spanish income tax rules would be €36,155.50, significantly higher than the tax liability under the Beckham Law. Additionally, the law can incentivise highly skilled foreign workers, executives, and professionals to move to Spain, providing them with a more favourable tax regime.
It’s important to note that this exemption only applies to income not effectively connected with a permanent establishment or business in Spain. In other words, if an expat is conducting business activities in Spain, such as through a branch or subsidiary, then the income earned from those activities would be subject to Spanish taxation.
How long can you legally use Beckham’s law to reduce your taxes in Spain?
Individuals who use Beckham’s law can do so for six years. After this period, they can apply to renew the special tax regime for six years, provided they still meet the eligibility criteria.
What are the potential risks of using Beckham’s law to reduce your taxes legally?
While Beckham’s law is a legitimate tax law in Spain, there are potential risks associated with using it to reduce your taxes. For example, if an individual does not meet the eligibility criteria, they could be subject to fines and penalties by the Spanish tax authorities. Additionally, if an individual is deemed to have used the law for tax evasion purposes, they could face legal consequences, including criminal charges. It is essential to seek the advice of a licensed tax professional to ensure that you are using the law correctly and in compliance with Spanish tax laws.
The door is open
If you are a high-income earner planning to move to Spain for work purposes, Beckham’s law can be a valuable tool to reduce taxes. The tax allowance can be used for six years, but is renewable under certain circumstances. The long and short, income is taxable at 24% up to €600,000 which significantly reduces income when compared to traditional progressive income taxes in Spain.
To know more about living in Spain and Beckham’s Law, contact us today.