SPAIN: An introduction to Private Wealth Law

Spanish taxation for high-net-worth international clients in 2024 continues to be in the higher range of tax rates at the National and Regional level (alleviation is possible with planification). The National government remains left-leaning, while in most of the Autonomous Communities (CCAA) (regional administrative divisions), right-wing governments are seeking to reduce taxation within the limits of their legislative capacity. Although the National government holds most taxing authority, the CCAAs have control over of certain taxes such as, Inheritance and Gift Tax and part of Personal Income Tax.

Personal Income Tax

Spanish Tax Residents

The Personal Income Tax (Impuesto de la Renta sobre Personas Físicas, IRPF) applies when the person is considered a tax resident in Spain. The IRPF is levied on the worldwide income. This tax is comprised of two segments, the general base (salaries, economic activities and real estate income) and the savings base (dividends, interest and capital gains income).

The general base will be taxed at a scale tax rate of 19% to 47%. The savings base, on the other hand, is taxed at a lower scale tax rate, from 19% to 28%. The maximum limits can vary per CCAA.

Non-Spanish Tax Residents

Non-residents are only taxed on income generated in Spain, also known as non-resident income tax (Impuesto sobre la Renta de No Residentes, IRNR). Also divided between the general base, taxed at 24% (if EU resident, 19%) and savings base, taxed at a flat rate of 19%.

To determine whether someone is taxable in Spain and therefore subject to IRPF and other taxes, according to National legislation and double taxation treaties, three criteria are followed: physical presence in the territory (183 days in Spain), economic and family ties with the country.

Trusts and Controlled Foreign Entities (CFC)

The Spanish legal system does not recognize trusts, which are transparent for tax purposes. The economic transactions between the Settlor and Beneficiaries are understood to be done directly between them with the corresponding tax implications.

On the other hand, as regards the tax transparency regime (CFC), it establishes that profits obtained by non-resident entities in which the Spanish resident taxpayer holds over 50% of the non-resident entity’s share capital, equity, profits, or voting rights  and the Corporate Income Tax payable by such entity is under 75% of the tax that would be payable in Spain, will be allocated to the Spanish resident and taxed accordingly.

Special Income Tax Regimes – Beckham & Mbappé

For those considering relocating to Spain, there is the special impatriates regime (Beckham Regime), which for taxpayers to be subject to taxation only on the income generated in Spain (vs. worldwide income) at a 24% tax rate up to 600,000 euros for the year they move to Spain and the following five years. Individuals who apply for this tax regime must, among other requirements, not have been a tax resident in Spain during the last five years and move to Spain for an employee or director position in a Spanish company, as a remote worker or as a high-skilled professionals in certain situations.

As a novelty, the CCAA of Madrid, with the aim of encouraging foreign investment and generate a positive economic impact in the region,has introduced a tax allowance for non-resident individuals who move to Madrid and invest in some financial assets in the form a deduction of 20% of the value of those investments in their IRPF. This relief, undergoing parliamentary proceedings, if approved, is to be known as the "Mbappé Law".

Focus Areas for Spanish Tax Authorities

The Spanish Tax Authorities, in their tax audit plans, have outlined the following as focus areas in the area of HNWIs, among others:

(i) international structures and CFC rules,

(ii) control over real estate holding entities owned by non-residents, and

(iii) control of Spanish tax residence. Additionally, an increase in review of compliance of Beckham regime requirements has been experienced.

For individuals with economic interests in Spain and other countries and who spend time in Spanish territory, it is advisable to keep track of days spent in Spain, retain travel documents, and even keep records of expenses incurred, to substantiate the days spent in the country, to avoid any doubts in a claim of Spanish tax residency. Those under Beckham regime, should ensure requirements are continued to be met and proof of it safeguarded.

Wealth Tax and the Temporary Solidarity Tax on Major Fortunes

Spanish Wealth Tax is levied both on tax residents, on their worldwide assets and rights, and on non-residents, on Spanish located assets and rights (including foreign companies where more than 50% of the assets consist of real estate in Spain) exceeding 700,000 euros. The tax is levied on the assets held as of 31 December. The tax rate is progressive, ranging from 0.2% to 3.5%. This tax is delegated to the CCAAs, which can introduce reductions, modify the applicable rate, or include deductions and allowances.

However, with the objective of standardising the tax treatment for large fortunes in Spain (understood in the law, as assets worth more than EUR3 million), the National government issued a National new Solidarity Tax on Large Fortunes, which was issued as a temporary tax and has recently become indefinite.

The Solidarity Tax is structured very similarly to the Wealth Tax. It is a National tax that does not allow modifications by Regional Authorities. Consequently, the CCAA that had significant exemptions on Wealth Tax, such as Madrid and Andalusia, have opted to apply the Wealth Tax with the maximum limits of the Solidarity Tax (which are still more benevolent than the application of the Wealth Tax in other regions). The Solidarity Tax is currently being challenged before the Constitutional Court on the grounds that it violates the jurisdictional powers of the Autonomous Communities and other arguments.

The Wealth and Solidarity Tax allow for significant planning and optimization, among others, exemption family companies or business assets, individual and joint family limits, subtraction of debts, joint limit with IRPF, etc.

Inheritance and Gift Tax

Spanish Inheritance and Gift Taxtaxes goods and rights acquired by inheritance, legacy or other type of succession, or by gift. Spanish residents are taxed on worldwide assets received, whilst non-residents are taxed on assets received located in Spain. Tax rates depend on different factors such as the net value asset received, the relationship between the parties and the taxpayer's pre-existing wealth.

As far as this tax is concerned, there are significant deductions and allowances of a regional nature, as this tax is controlled by the CCAAs which allows for savings maximization. 

The National government has threatened to regulate Inheritance Tax at a National level to homogenise the tax treatment across CCAAs (as Wealth Tax). Given the significant differences between CCAA and tax allowances, it is advisable to study the tax situation of each potential taxpayer in this regard to enable proper tax planning upon asset transfers and family wealth conservation. Options to consider can be, transfer of bare ownership of assets, use of debt, transfer family business, skipping generation transfers, etc.

Effective tax planning is vital for HNWIs navigating the Spanish tax system, given the potential burdensome tax rates. This highlights the need for strategic planning to optimize tax burdens, maximize deductions, and leverage benefits.