The foreign perception of the Spanish tax system is made up of two, connected parts; it is regarded as a high-taxing jurisdiction, but where it is commonplace to exist below the tax radar, or not declare the full degree of one’s wealth.
As is often the case with misplaced perceptions, they often arise out of exaggeration, mis-information or are out of date.
In more recent years, the Spanish tax authorities, or Hacienda, have been working extremely hard to collect the taxes, making it much more difficult to avoid declaring your real overall wealth.
One of the most common areas of tax avoidance has been property sales, which was believed to account for up to a fifth of the entire Spanish underground economy. In the past it was customary to declare a lower sale price than the actual price (with the difference paid in cash), to avoid capital gains and other property taxes.
The Hacienda cracked down on this practice by using a specially designed program which links their computers with those of the public notary and property register offices throughout the country, comparing sales of similar properties in the same area to establish if a sale value was realistic.
Spain has also suffered from the non-declaration of overseas assets. They have worked to rectify this on both an international and domestic basis.
From 6 April 2001 Spain, along with 30 other nations agreed to exchange information on accounts held in one jurisdiction where the account holder resided in another. In 2005 the European Savings Directive added withholding tax powers, and the upcoming OECD automatic exchange of information will enable the Spanish authorities to obtain whatever they need, to compare to what is being declared to them by the individual.
Domestically, Spain has improved considerably and in particular on Wealth Tax, where the current version has been in place since September 2011. For Spanish residents this requires the completion of a Wealth Tax return, showing worldwide chargeable assets. In 2013, they introduced, the Modelo 720, a declaration of non-Spanish (offshore) assets, where the individual values exceed €50,000.
Since the summer of 2014, the Hacienda has been comparing the Wealth Tax and Modelo 720 returns for discrepancies, or compared to information they already hold and receive from other countries. As a result they have raised thousands of enquiries.
The modernisation of the Spanish tax administration process has not only significantly increased their tax-raising capabilities, but also gone a long way to dispelling the myth that Spain is laid back in respect to tax collection.
With regard to the other myth, is Spain really a high taxing jurisdiction? It is certainly the case for those very wealthy families and high earners. Spanish residents are taxed on their world-wide ‘general’ income (basically anything other than “savings income”), at progressive scale rates. The income tax scale rates are made up of the ‘State tax rates’ and the ‘Community tax rates’ (which are set independently by the particular Autonomous Community).
Generally, the top combined rate of tax is 47%, but can be lower or higher with adjustment to the Communities element.
The world-wide savings income of residents and the Spanish savings income of non-residents have been taxed since 2012, at 20% (first €6,000), 22% (next €44,000), and 24% thereafter.
But it is the dreaded Wealth Tax which can really impact the wealthy. Spain has imposed a maximum rate of 2.5%, but again where the Communities can increase the rate (as an example Andalućia is 3.03%), on assets valued over €10,695,996.
However, simple arrangements can significantly reduce the overall tax payable.
Spain allows you to declare your income as an individual, or alternatively jointly, where the total income is combined. This can be of particular benefit where one spouse is in receipt of the majority of income (perhaps where a pension is payable to the spouse who previously worked), and would otherwise suffer a much higher scale rate of taxation if taxed individually.