Living in Spain

The Spanish Legal & Taxation System

Civil Law: The Spanish legal system is based on the Code Napoleon and as such is primarily codified and relatively inflexible. Unlike common law countries such as the UK and Ireland, where judges have the ability to create law through precedents and/or actively interpret statutes (Acts of Parliament), their Spanish counterparts must slavishly adhere to the Civil Code - This having both positive and negative consequences.

In particular, it should be noted that Spain has no equivalent of the laws of equity which specifically allow judges considerable flexibility to develop case law without the need to consider a codified instrument provided such case law doesn't directly conflict with an existing statute.

Civil Law and Companies: In 1978 Spain introduced its modern Constitution which has given the Spanish juridical system a much needed stability. In particular, all constitutional matters are under the final remit of the Constitutional Court which is important to investors in Spain since many tax planning methods used to mitigate Spanish tax exposure are often dependent on using EU Directives and Regulations, Double Taxation Treaty provisions and indigenous constitutional rights.

Spanish Tax System

There is a common misconception in the UK and Ireland that foreign residents need pay little or no tax in Spain and that the authorities are quite relaxed about collecting taxes. In reality, whilst prudent decisions can save investors and/or fiscal resident's significant sums, nothing could be further from the truth. In reality, the Spanish both rigidly enforce their taxes, require permanent residents and foreign companies to acquire tax identification numbers, tax residents on their worldwide income and assets, have punitive inheritance and gift taxes, property acquisition taxes as high as 15.5% plus taxes that UK and Irish nationals would not be used to such as the annual wealth tax. Nevertheless, as will be shown, despite the quagmire of potential tax exposure a well advised person can protect his/her hard earned assets relatively efficiently - but only if executed through tried, trusted and needless to say scrupulously legal methods.

1. Fiscal Residence: If an individual is in Spain for over 183 Days in any Fiscal Year (This correlates with the Calendar Year in Spain) he or she will be automatically deemed resident in Spain for tax purposes.

2. Fiscal Identification Numbers: A Foreigners Identification Number or NIE (Numero de Identificacion de Extranjeros) or in some areas a Fiscal Identification Number or NIF (Numero de Identificacion Fiscal) is required by all individuals fiscally resident in Spain.

3. Income Tax: Individuals deemed to be fiscally resident in Spain are taxed on their worldwide income, individuals not fiscally resident in Spain will - subject to applicable double taxation treaties - be only subject to income tax on their Spanish income such as income derived from property rental.

4. Capital Gains Tax (CGT):

Non-Residents with Spanish assets are subject to a 35% CGT rate and further cannot rollover the gain to a new home. Where one buys a home from a non-resident individual the purchaser must hold back 5% of the purchase price and pay it to the Spanish tax authorities as an advance payment on behalf of the vendor in respect to his or her CGT liability.

Spanish Residents (corporate or individual) are subject to a 15% CGT rate. Any asset sales occurring in a period of less than a year are treated as income and hence subject to income tax.

Offshore Companies: It is possible to use a tax free offshore company to own the shares of a local Spanish Srl or Branch of a foreign company registered in Spain as a method of legally avoiding exposure to any capital gains taxes. However, to achieve this there has to be careful planning by a qualified expert - at the time of writing, the use of such sophisticated tax planning methods only starts to make economic sense for those purchasing property in Spain valued over €400,000.

5. Wealth Tax (Impuesto sobre el patrimonio or IP): Wealth tax applies after a certain level of wealth has been reached. At the time of writing each resident individual is allowed have a personal wealth level deduction of €108,182.18 plus an own home deduction of €150,253.03 (Total = €258,435.21). For couples the rates are multiplied by 2 giving a total of €516,870.42. The tax rates vary between 0.2% to 2.5% on total net wealth (with certain albeit limited deductions) payable per annum. However, it should be noted that the higher rates apply at a relatively low level that would automatically include many individuals purchasing properties in more desirable areas, such as Marbella and Sotogrande.

6. Inheritance & Gift Taxes (Impuestos sobre Sucesiones y Donaciones): These apply, unlike in many countries, even in the case of a deceased husband passing on his wealth to his wife. The recipient pays the tax. Further, the standard rates of tax are subject to a Multiplier varying from 1.00 to 2.40 depending on the Class of the Recipient:

Beneficiary Class Multiplier: Under Spanish law different Classes of beneficiary are subject to different multipliers based on the generic rates below:

Class 1: Spouses, children, parents, grandchildren. Multiplier from 1.00 to 1.20 depending on the sum received.
Class 2: Extended family such as cousins, nephews, nieces. Multiplier from 1.59 to 1.91 depending on the sum received.
Class 3: Others. Multiplier from 2.00 to 2.40 depending on the sum received.

A much more in-depth explanation - including examples and diagrams - is given in the new book "How to Buy Spanish Property", available now for just £4.99