UPDATED: 2nd January 2020
This is perhaps the topic that creates the most confusion and misinformation among expats. In the article below, we aim to provide a basic explanation of the main taxes that resident and non-resident visitors or expats are likely to come across in Spain.
1. RESIDENT AND NON-RESIDENT INCOME TAX
Do you personally need to file a tax return and if so, which type?
Are you Resident or Non-Resident for tax purposes?
The starting point is to identify whether you are RESIDENT or NON-RESIDENT in Spain for tax purposes, as each requires an entirely different tax return.
The official rule is that anyone who spends more than a total of 182 days in Spain per calendar/tax year (whether in one single continuous period or spread across several visits through the year) is legally classed as RESIDENT and should technically declare their tax affairs accordingly.
However, registering as a ‘RESIDENT’ in Spain and obtaining your small green Residencia card at a Police Station doesn’t automatically register you as a TAX RESIDENT with the tax office, nor do those two departments tend to exchange that information without an express request or legal reason. Failing to actively register with the tax office as fully resident after registering at the police station is a common omission.
The downside of not registering is that if you subsequently seek any benefit, exemption or special tax rate that is only available to ‘residents’, you can bet that the taxman will treat you as ‘non-resident’ and exclude you from the benefit or exemption that you are trying to secure. As an example, non-residents (and those who fail to register as ‘tax resident’) are subject to a 3% retention from the sale proceeds when selling any property in Spain, which is paid directly to the tax office on account of Capital Gains Tax. However, ‘tax residents’ are not subject to any such retention.
Many expats do not register themselves as resident for tax purposes for different reasons. Perhaps they don’t know how to register or are baffled by the bureaucracy. Or perhaps they would prefer to stay as ‘non-resident’ in order save tax.
However, those who wrongly register (or who fail to register at all) are increasingly likely to be discovered, which can lead to penalties and interest for not filing a correct (or any) tax return on time. The taxman can claim unpaid back taxes for up to 4 tax years, so anybody caught in 2019 who has declared incorrectly for over 4 years will have to correct their affairs all the way back to the 2014 tax year.
So how can the taxman find out that you have wrongly declared? Spanish Banks are a common source of the information. They are now required to periodically write to customers who hold ‘non-resident’ accounts to require up-to-date proof of their non-resident tax status (e.g. a recent P60 Employment Tax Slip or Pension paperwork from the country of actual residence, or a self-employment tax return). Those who cannot or do not provide this information not only risk having their account frozen, but the bank will most certainly inform the Spanish tax office of the failure to disclose the information.
Implications of tax residency
The biggest implication that some expats fail to consider is that if you are legally a tax resident in Spain, then you must file an annual tax return declaring your worldwide tax affairs (i.e. your worldwide income, capital gains etc) for the previous year. Conversely, those who are permanently resident in the UK or other EU countries must obviously declare their worldwide tax affairs in that country instead.
So what happens when you have tax interests in two or more countries? Well fortunately the UK and all EU countries have tax treaties in place covering all major taxes (income, capital gains, inheritance) whereby any tax you pay in the ‘non-resident’ country can be reclaimed/offset against any corresponding tax you have to pay in your home country of residence. This essentially means that you don’t have to pay twice.
There are however exceptions to this rule and your home country will only credit you UP TO the amount you are liable to pay in the home country. So, if you are resident in the UK and pay tax on a Spanish asset or income, the UK taxman will only credit you the foreign tax paid UP TO the amount of UK tax you have to pay on that Spanish asset or income. So if the Spanish tax was higher than the corresponding UK tax, you will only receive a UK credit for the lower amount.
Do your financial circumstances require you to file either a Resident or Non-Resident Spanish tax return?
Spanish tax residents must file a tax return in Spain if any of the following apply:
- Your worldwide employment income exceeds €22,000 in the relevant tax year;
- You own a property that is not your main residence;
- You are self employed or run your own business anywhere in the world;
- You receive property rental income of more than €1,000 per year worldwide;
- You own a 2nd property (in Spain or overseas) that is not your main home;
- You have Capital Gains or Savings Income of more than €1,600 per year worldwide;
- You have changed jobs within the last year and received €1,500 or more from old company;
- It’s your first year declaring tax residency in Spain.
One exception is where you have 2 separate jobs for different
employers, in which case you must file a tax return if you earn more
than a combined total of €11,200 net.
Your tax figure for the above calculations is the net figure after
deducting social security payments, pension contributions, personal
allowances and accountant/professional costs.
In addition, you must declare all assets outside of Spain that are each individually worth €50,000 or more.
Non-Residents in Spain must file a tax return in Spain if:
- You own a property in Spain that is not your main private home year-round;
- Your Spanish based income exceeds €22,000 per tax year;
- You are self-employed or run your own business in Spain;
- You receive property rental income of more than €1,000 per year in Spain;
- You have Capital Gains or Savings Income of more than €1,600 in Spain.
So what is the rule for non-residents who spend less than half of the
year in Spain but who own one or more properties here in Spain? In this
instance, a Non-Resident Tax Return MUST be filed, regardless of
whether you actually rent out any such property. This is often referred
to among expats as the ‘non-letting tax’.
In Tenerife, it is basically a case of ‘guilty even where proven
innocent’. Following decades of non-residents failing to declare rental
income on their holiday homes, the taxman introduced a universal tax
rule whereby everybody is deemed to have earned a notional 2% income
return on their property, regardless of whether they actually rented it
out or not.
That notional 2% income return is calculated on the Town Hall
‘Catastral’ (i.e. Council Tax or Rateable) value of the property, which
is typically slightly lower than the actual market value. This figure
can be found on any IBI (Council Tax) receipt. Once the Catastral
property value is determined, a 2% income is then calculated on that
figure. You must pay income tax on that 2% income amount. The tax rate
is a flat 24%.
For 2019, the applicable income tax bands are as follows:
Up to €12,450 – 19%
€12,450 – €20,200 – 24%
€20,200 – €35,200 – 30%
€35,200 – €60,000 – 37%
More than €60,000 – 45%
However, the above figures are approximate ready-reckoners. Precise
tax figures and allowances vary from region to region and should be
calculated based on personal circumstances.
The deadline for filing all personal Income Tax returns in Spain is
by 30th June each year, e.g. for the tax year 2018 which ended 31st
December 2018, the deadline for filing your tax return is 30th June
As mentioned in more detail above, Spain and most other countries
have double-taxation treaties, meaning that tax you pay in the
non-resident country can be reclaimed against corresponding tax paid in
the home country (subject to limits and conditions), meaning that you
don’t pay twice on the same income or asset.
- Group I: direct children (including adopted) under 21 years get an allowance of €47,859.
- Group II: direct children (including adopted) older than 21, grandchildren, spouses and parents/grandparents (including adoptive) get an allowance of €15,957. Tenerife also recognises unmarried partners registered as parejas de hecho.
- Group III: siblings, aunts and uncles, nieces and nephews, in-laws and their ascendants/descendants get an allowance of €7,993.
- Group IV: cousins, all other relatives, unmarried partners and those unrelated get no allowance.
- Those with disabilities are entitled to an allowance of either €47,859 or €50,253 depending on the extent of the disability.
- Remaining Inheritance up to €7,993: 7.65%
- €7,993–€31,956: 7.65 to 10.2%
- €31,956–€79,881: 10.2 to 15.3%
- €79,881–€239,389: 15.3 to 21.25%
- €239,389–€398,778: 25.5%
- €398,778–€797,555: 29.75%
- €797,555+: 34%
|Pre-existing wealth €||Groups 1 & II||Group III||Group IV|
|€0 – €402,678||1.0000||1.5882||2.0000|
|€402,678 – €2,007,380||1.0500||1.6676||2.1000|
|€2,007,380 – €4,020,771||1.1000||1.7471||2.2000|
|Over €4,020,771 1.2000||1.2000||1.9059||2.4000|
3. IGIC SALES TAX (VAT)
Most countries in the world impose a sales or turnover tax upon business transactions. In the UK and Ireland this is called V.A.T. (Value Added Tax). In mainland Spain and the Balearics it is called IVA (Impuesto sobre el Valor Añadido). However, as the Canary Islands are an autonomous region, they have their own separate sales tax called I.G.I.C. (Impuesto General Indirecto Canario).
This works broadly in a similar way to most sales taxes around the world. IGIC is on average much lower than most comparable sales taxes around the world.
After having teased us with a small decrease in IGIC during 2019, the Canarian Government has now hiked the rates again, but not only for the standard rate of IGIC. They have also increased the special rate and have removed some IGIC exemptions. The following are the main changes:
- A rise in the general rate of IGIC to 7% (in 2019 it was reduced from 7% to 6.5%).
- A scrapping of the exception (0%) rate of IGIC for commercial electricity bills, which now attract 3% IGIC. However, household electricity supplies remain 0% rated.
- Increase the IGIC charged for telecommunications services (phone bills etc) to 7% (was 3%).
- An increase in the Special IGIC tax rate (for luxury goods etc) from the current 13.5% to 15%.
The IGIC bands therefore now apply as follows:
0% band (Tipo Cero) – water supplies; the sale of sanitary and veterinary products; books, newspapers and magazines; officially protected housing works; deliveries of certain foods; air or sea transport between the Canary islands.
3% band (Tipo Reducido) – Mining industry; Chemical industry; Textile sector; Wood industry; Paper industry; Ground Transportation; Vehicle repair.
7% band (Tipo General) – general goods and services not specified elsewhere here.
9.5% band (Tipo Incrementado) – Import/sale of basic types of vehicles or transportation devices.
15% band (Tipo Especial Incrementado) – Import/sale of luxury/powerful vehicles, cigars (costing over €1.80 each), alcoholic beverages, jewellery, fur and perfume products.
20% band (Tipo Especial) – Production of Black Tobacco (but 35% for Blonde Tobacco).
Meanwhile, the following activities/products continue to be exempt from IGIC:
postal services, healthcare, blood deliveries, social assistance services, education, services provided by sports associations, cultural companies, insurance and reinsurance, financial operations, small retail trading.
Self-employed individuals (Autonomo) do not have to charge IGIC on products and services provided they do not exceed an annual turnover of €30,000. However, they may optionally elect to charge IGIC if they prefer. This exemption does not apply to unlimited partnerships (‘comunidad de bienes’).
4. TRANSFER TAX / STAMP DUTY (Impuestos de Transmissiones Patrimoniales)
This tax applies to the transfer or transmission of title in certain assets from one person to another. It commonly applies to the transfer of land and property and company shares (which is often called ‘Stamp Duty’). However, in Tenerife, this tax is also imposed on the resale of a second-hand vehicle.
The tax is payable on the declared contract value (or the government tables official value, whichever is the greater), regardless of whether money actually changes hands in the transaction. The tax is legally payable by the person who acquires the asset in question (e.g. a buyer or recipient).
Rates for the most common transactions include:
Transfer of a second-hand vehicle – 5.5% (vehicles up to 10 years old – sliding fixed fees thereafter)
Transfer of Real Estate and Land – 6.5%
Options to buy Real Estate/Land – 1%
Transfer of Real Estate at Auction – 7%
Transfer of Shares etc – Sliding Scale
Transfer of Loans/Pensions/Bonds – 1%
Please note that since the financial crisis that hit in 2007, the taxman has been rather reluctant to accept that real-estate property prices for less desirable properties substantially plummeted. The result is that when you buy a property, the taxman may well send you an ‘assessment’ within approximately 5 years of completion of a property transaction. The assessments essentially allege that the declared value was too low and suggest what is the correct figure that should have been inserted.
Naturally, such assessments do a good job of catching those who deliberately under-declare the property value in order to pay less capital gains tax upon the sale. However, given that the capital gains tax is payable by the seller and the transfer tax is payable by the buyer, buyers today have very little incentive to mess around with under-declared prices. In such instances, they are still likely to receive an ‘assessment’ and are also just deferring a potentially even bigger capital gains tax bill for when they ultimately sell the property themselves in the future.
The assessments do however tend to unfairly penalise those who have genuinely obtained a ‘bargain’ or who have paid under the odds due to other criteria (squatters, subsidence, planning problems etc).
If you have genuinely obtained a property for the originally declared price, you are perfectly within your rights to challenge the ‘assessment’. However, the cost of hiring an accountant and/or lawyer to properly present your challenge and to follow it up to a satisfactory conclusion could end up costing more than the small difference between the original 6.5% tax calculation and the 6.5% assessed tax on the slightly higher ‘assessment’ amount. As such, unless the amount is huge, most accountants recommend simply paying the extra tax and avoiding the risk of ending up in the taxman’s ‘little black book’ for years to come.
One other option to avoid the above problem is to get your lawyer to ask for an Official Tax Office Valuation at the time you purchase the property. However, this can be a two-edged sword. You might get lucky and find the valuation to be lower than what you were previously planning to declare. However, if the amount is higher, you are essentially stuck with that amount and will definitely receive an ‘assessment’ if you declare any lower amount upon the purchase. The other downside is that obtaining an official valuation can take up to 8 weeks, which could cause problems where the parties are waiting to complete on a property transaction.
5. CAPITAL GAINS TAX
Many foreigners in Tenerife are confused by this tax, particularly when selling a property. CGT (Impuesto sobre Incremento de Patrimonio de la Venta de un Bien Inmeuble) depends on the date of the initial purchase of the property, its value at the purchase and sale dates, plus deductions allowances for certain expenses (e.g. notary and lawyer’s fees) and certain home improvements.
Once the above factors are taken into account, the applicable tax rate is calculated on the net benefit as follows:
- Up to 6.000 Euros – 19%.
- From 6.000 to 50.000 Euros – 21%.
- From 50.000 Euros and upwards – 23%.
Fiscal residents in Spain (i.e. those filing resident tax returns) are granted reinvestment relief on their principal private residence they have lived in for 3 or more years, if they buy another property using the proceeds of sale, and provided that the new property is purchased within two years of the said sale. The reinvestment relief is calculated on the amount of the sale proceeds that are reinvested in the new property. So, if the purchase price of the new property is greater than the sale price of the old property, the sale is completely exempt from CGT.
For those who downsize and, for example, spend 50% of the sale proceeds on a new property, then that 50% is all that will be exempt. However, if there is a mortgage to be paid off with the proceeds, the calculation is based on the amount left over as capital once the mortgage is cleared.
To be entitled to this relief, the capital gain and the intention to reinvest some or all of the proceeds must be declared at the time of sale. Spanish Residents over 65 who sell their main home that they have lived for more than three years will be completely exempt from CGT, regardless of whether they intend to reinvest.
There are also reductions available for Spanish residents who acquired property on or before 31st December 1994. However, this only applies to assets valued at no more than 400,000 Euros at the date of sale or disposal.
The reduction only applies to the gain accumulated up to 20th January 2006 in the following percentages:
- 11,11% in real estate.
- 25% in shares.
- 14,28% for all other items.
The rules are slightly different for non-residents. When a non-resident sells a property, he or she is required to leave a 3% retention at the point of signing, as a deposit towards any potential CGT payable. This 3% non-resident retention is withheld by the buyer and paid directly to the tax office. The seller than has a 3 month deadline to file a full CGT return in respect of the sale, at which point, if no CGT was actually payable, then a refund of the 3% already paid can be requested. However, if the actual CGT owing is greater than the 3% paid, then the remaining balance owing must then also be paid on top.
N.B. The above Capital Gains Tax (Impuesto sobre Incremento de Patrimonio de la Venta de un Bien Inmeuble) is NOT to be confused with ‘Plus Valia’, which is an entirely separate tax that also accrues upon the sale of a property. Plus Valia is charged by the local Town Hall (Ayuntamiento) for the property, based on the years of ownership and the notional increase in value of the land (using the IBI Council Tax yearly valuations).
For more information on Plus Valia, including recent Court cases on the subject, click HERE.
6. COUNCIL TAX / PROPERTY TAX / RATES
All residential and commercial properties in Tenerife must pay an annual tax known as ‘IBI’ (Impuesto sobre Bienes Inmuebles).The tax is calculated for each calendar year, but is payable between 1st May and 15th July in the following year.
The calculation is based on complicated formulae used by the Town Halls based on location, square meterage of plot and buildings, plus facilities such as garages, swimming pools etc.
When purchasing a property, it is essential that you register the property in your name at the Ayuntamiento’s ‘Catastral Office’. It is also highly recommended to set up a direct debit, to avoid the possibility of missing a payment notification and ending up with a late payment penalty or interest.
Rates vary considerably from property to property and from Town Hall to Town Hall, but as a very rough guide, annual IBI in Euros for an apartment should be somewhere in the low hundreds whilst for a 3 bed villa should be in the high hundreds.
In addition to IBI, each property must also pay a smaller subscription towards ‘Basura’ (Rubbish collections’). This is substantially lower than IBI and will typically range from €30 to €100 per annum.
7. MOTOR VEHICLE ROAD TAX (Impuestos sobre Vehiculos de Motor)
8. PLUS VALIA TAX (Town Hall Tax on the sale of a Property