The most common tax problems foreigners in Spain run into
One of the toughest challenges for foreigners in Spain is understanding the country’s tax system. The Local spoke to some financial experts to find out how foreigners can avoid getting into trouble with the country’s tax agency.
Not paying Spain’s wealth tax
“I would say one of the most common tax problems is wealth tax for those with a higher net worth,” Patrick MacDonald, a Malaga-based financial adviser who runs the website Finance-Spain and is part of Blacktower Financial Management Group, told The Local.
This “patrimonio” tax applies to residents on their world wide assets. This includes own home property with a value over the €300,000 allowance as well as to their highly valued assets in Spain and abroad (2nd homes, cars, investments, boats) if they have a value above the €700,000 general allowance.
The tax also applies to non-residents on their Spanish property and their highly valued assets (also a €700,000 allowance) but only those in Spain and not overseas.
This figure can vary between regions, but the national rate always applies to non-residents. The wealth tax ranges from 0.2 to 3 percent on the value of the assets.
Many foreigners who move to Spain or buy a second home here aren’t aware of this tax’s existence, in some cases because they don’t have it in their home country.
According to Focus Legal, “Article 6 of Spain’s Wealth Tax Act has been modified to include the provision whereby non-resident tax payers are obliged to appoint a fiscal representative in Spain, and failure to comply with this obligation will constitute a serious offence which carries a fine of €1,000, which can be increased in the event of repeat offenders”.
Patrick MacDonald’s advice for alleviating the rate of Spain’s wealth taxation is that it “can be mitigated (especially for retirees) in many situations by structuring investments within unit-linked life assurance policies”.
Not declaring overseas assets
“A common concern in recent years is the late or non-declaration of the M720 for declaring overseas assets,” Jonathan Goodman, Development Director for Spain at the Spectrum IFA Group, told The Local.
“This is due for Spanish Nationals as well as foreign residents.
“People have heard of possible excessive fines being applied for late filing and bury their heads in the sand. A seasoned tax lawyer can make the process as painless and cost efficient as possible and put you at ease.”
READ ALSO:
- Brexit: The money matters Brits in Spain need to consider
- Do I really need to the declare foreign assets to Spanish taxman?
Not paying non-resident taxes in time
Those who own a holiday home in Spain must pay an annual tax by December 31st even if they are a non-resident and don't rent out their property.
The paperwork for the tax known in Spanish as Renta Imputada (Deemed rental income) must be filed by December 31 using the Modelo 210 and applies to all non-resident owners, even those who don't make money by renting out their properties.
READ MORE: What you need to know about Dec 31st tax deadline for second-home owners in Spain
It’s also worth noting that UK citizens who don't live in Spain but let out a property in the country will no longer be able to dock off expenses from their tax declaration now that they are non-EU citizens due to Brexit.
The measure relates to the IRNR (Non-resident Income Tax), which for EU residents is 19 percent on net income and for non-EU is 24 percent.
Crucially however, foreign non-resident homeowners from the EU, Norway and Iceland can claim back many more expenses (mortgage interest, insurance, IBI, community fees etc) which non-EU resident property owners cannot.
READ MORE:
Why it’s ‘absurd’ that Britons who let out properties in Spain will see taxes triple after Brexit
Forgetting to pay property tax
Resident and non-resident homeowners in Spain also need to pay their local property tax or IBI (also called SUMA), which is levied by the local town hall where the property is.
The dates of payment vary between places so if you miss the annual deadline, you can expect to pay anywhere between 5 to 20 percent of the initial IBI fee, which is based on the value of the property (0.4 to 1.1 percent of its annual cadastral value decided by the Spanish taxman).
A way of avoiding fines for late payment is to set up a direct debit for your IBI to be paid on a yearly basis, an option which is usually available.
Not updating a will
"The concept of an international will is woolly to say the least and the general consensus is that they do not work," Jonathan Goodman, Development Director for Spain at the Spectrum IFA Group, explained.
"(For Britons in Spain),it’s important to have a will in Spain and in the UK post-Brexit, especially as there is no official Will registry in the UK, unlike Spain.
"We hear a lot of 'Oh, we really must do it' from our clients but the reality is different and it can cause much unnecessary distress in the future if it is not dealt with."
Tax lawyer Alejandro del Campo, partner at DMS Consulting in Mallorca, told The Local. "It's crucial that British residents in Spain plan their inheritances because if they don't draft a UK will and they die while being residents in Spain, the EU's Succession Regulation would apply and their inheritance would be governed by the regional Spanish laws in which they have their main address".
READ MORE:Why Brits in Spain should consider drafting a will now more than ever
Not fully understanding Spain’s inheritance tax
Believe it or not, choosing the right region to live in and/or invest in Spain is crucial when it comes to a family's inheritance as you can effectively save thousands of euros.
Spain's inheritance or succession tax, known as “impuesto de sucesiones” is complex and controversial, but it's very important to understand how it works in order to avoid any unfortunate financial surprises when a loved one with a connection to Spain passes away (it’s also applicable to non-residents).
"You can play with this a lot and save a lot of money," Alejandro del Campo, partner at DMS Consulting in Mallorca, told The Local in a nutshell.
Del Campo, who has a large portfolio of foreign clients at his firm, explains how "for example for a ‘modest' inheritance of €800,000 from a father to a direct relative, such as to a son, the differences between regions can be insane, and even more so for larger inheritances".
According to information from Spain's Council of Economists and Fiscal Advisors (REAF), in 2020 the region with the highest inheritance tax was Asturias, where a thirty-year-old single person would have to pay over €100,000 in inheritance tax on assets worth €800,000.
The other regions with high inheritance tax in Spain are Castilla y León, the Valencia region, and Aragón, where an heir with the same characteristics listed above would have to pay between €55,000 and €80,000.
READ MORE:
- Why choosing the right region in Spain can save you thousands in inheritance tax
- Five things you need to know about inheritance tax in Spain
Not being familiar with Spain’s savings tax
Another common stumbling block for foreigners in Spain is the country’s savings income tax (impuesto sobre el ahorro).
“This applies to earned interest, shareholder dividends, gains on stocks, shares and other investments. It is taxed at rates of 19 percent (up to €6,000),21 percent (€6,000 to €50,000) and 23 percent (over €50,000),” Patrick MacDonald of Finance-Spain told The Local.
“If taken annually this can have a detrimental effect on your savings and investments.
“However, a person can shield themselves from the eroding effect of this tax and benefit from compound interest by wrapping their investments in a Spanish Compliant Bond.”
Not filing your tax return properly or in time
Self-employed people and SMEs that wrongly declare food, clothing and other personal or travel costs that are unrelated to the job face fines from Hacienda, Spain’s tax agency.
The same can be said for any number of mistakes in quarterly or annual tax returns, or if they are not completed in time.
There are filing deadlines for non-residents and generally they have to report income and pay taxes every three months, except for deemed income from a property which is due on December 31 of the following year.
Depending on whether Hacienda considers your tax breach to be light or severe, the penalties can vary enormously. If you hand in your papers late but voluntarily you can expect a lower fine than if there’s a tax inspection of your affairs.
The best bet is to enlist the help of a gestor, something which most self-employed Spaniards and companies do already, if you want to get a heads up about deadlines and any mistakes you may have made on your tax return.
READ ALSO:
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Not paying Spain’s wealth tax
“I would say one of the most common tax problems is wealth tax for those with a higher net worth,” Patrick MacDonald, a Malaga-based financial adviser who runs the website Finance-Spain and is part of Blacktower Financial Management Group, told The Local.
This “patrimonio” tax applies to residents on their world wide assets. This includes own home property with a value over the €300,000 allowance as well as to their highly valued assets in Spain and abroad (2nd homes, cars, investments, boats) if they have a value above the €700,000 general allowance.
The tax also applies to non-residents on their Spanish property and their highly valued assets (also a €700,000 allowance) but only those in Spain and not overseas.
This figure can vary between regions, but the national rate always applies to non-residents. The wealth tax ranges from 0.2 to 3 percent on the value of the assets.
Many foreigners who move to Spain or buy a second home here aren’t aware of this tax’s existence, in some cases because they don’t have it in their home country.
According to Focus Legal, “Article 6 of Spain’s Wealth Tax Act has been modified to include the provision whereby non-resident tax payers are obliged to appoint a fiscal representative in Spain, and failure to comply with this obligation will constitute a serious offence which carries a fine of €1,000, which can be increased in the event of repeat offenders”.
Patrick MacDonald’s advice for alleviating the rate of Spain’s wealth taxation is that it “can be mitigated (especially for retirees) in many situations by structuring investments within unit-linked life assurance policies”.
Not declaring overseas assets
“A common concern in recent years is the late or non-declaration of the M720 for declaring overseas assets,” Jonathan Goodman, Development Director for Spain at the Spectrum IFA Group, told The Local.
“This is due for Spanish Nationals as well as foreign residents.
“People have heard of possible excessive fines being applied for late filing and bury their heads in the sand. A seasoned tax lawyer can make the process as painless and cost efficient as possible and put you at ease.”
READ ALSO:
- Brexit: The money matters Brits in Spain need to consider
- Do I really need to the declare foreign assets to Spanish taxman?
Not paying non-resident taxes in time
Those who own a holiday home in Spain must pay an annual tax by December 31st even if they are a non-resident and don't rent out their property.
The paperwork for the tax known in Spanish as Renta Imputada (Deemed rental income) must be filed by December 31 using the Modelo 210 and applies to all non-resident owners, even those who don't make money by renting out their properties.
READ MORE: What you need to know about Dec 31st tax deadline for second-home owners in Spain
It’s also worth noting that UK citizens who don't live in Spain but let out a property in the country will no longer be able to dock off expenses from their tax declaration now that they are non-EU citizens due to Brexit.
The measure relates to the IRNR (Non-resident Income Tax), which for EU residents is 19 percent on net income and for non-EU is 24 percent.
Crucially however, foreign non-resident homeowners from the EU, Norway and Iceland can claim back many more expenses (mortgage interest, insurance, IBI, community fees etc) which non-EU resident property owners cannot.
READ MORE:
Why it’s ‘absurd’ that Britons who let out properties in Spain will see taxes triple after Brexit
Forgetting to pay property tax
Resident and non-resident homeowners in Spain also need to pay their local property tax or IBI (also called SUMA), which is levied by the local town hall where the property is.
The dates of payment vary between places so if you miss the annual deadline, you can expect to pay anywhere between 5 to 20 percent of the initial IBI fee, which is based on the value of the property (0.4 to 1.1 percent of its annual cadastral value decided by the Spanish taxman).
A way of avoiding fines for late payment is to set up a direct debit for your IBI to be paid on a yearly basis, an option which is usually available.
Not updating a will
"The concept of an international will is woolly to say the least and the general consensus is that they do not work," Jonathan Goodman, Development Director for Spain at the Spectrum IFA Group, explained.
"(For Britons in Spain),it’s important to have a will in Spain and in the UK post-Brexit, especially as there is no official Will registry in the UK, unlike Spain.
"We hear a lot of 'Oh, we really must do it' from our clients but the reality is different and it can cause much unnecessary distress in the future if it is not dealt with."
Tax lawyer Alejandro del Campo, partner at DMS Consulting in Mallorca, told The Local. "It's crucial that British residents in Spain plan their inheritances because if they don't draft a UK will and they die while being residents in Spain, the EU's Succession Regulation would apply and their inheritance would be governed by the regional Spanish laws in which they have their main address".
READ MORE:Why Brits in Spain should consider drafting a will now more than ever
Not fully understanding Spain’s inheritance tax
Believe it or not, choosing the right region to live in and/or invest in Spain is crucial when it comes to a family's inheritance as you can effectively save thousands of euros.
Spain's inheritance or succession tax, known as “impuesto de sucesiones” is complex and controversial, but it's very important to understand how it works in order to avoid any unfortunate financial surprises when a loved one with a connection to Spain passes away (it’s also applicable to non-residents).
"You can play with this a lot and save a lot of money," Alejandro del Campo, partner at DMS Consulting in Mallorca, told The Local in a nutshell.
Del Campo, who has a large portfolio of foreign clients at his firm, explains how "for example for a ‘modest' inheritance of €800,000 from a father to a direct relative, such as to a son, the differences between regions can be insane, and even more so for larger inheritances".
According to information from Spain's Council of Economists and Fiscal Advisors (REAF), in 2020 the region with the highest inheritance tax was Asturias, where a thirty-year-old single person would have to pay over €100,000 in inheritance tax on assets worth €800,000.
The other regions with high inheritance tax in Spain are Castilla y León, the Valencia region, and Aragón, where an heir with the same characteristics listed above would have to pay between €55,000 and €80,000.
READ MORE:
- Why choosing the right region in Spain can save you thousands in inheritance tax
- Five things you need to know about inheritance tax in Spain
Not being familiar with Spain’s savings tax
Another common stumbling block for foreigners in Spain is the country’s savings income tax (impuesto sobre el ahorro).
“This applies to earned interest, shareholder dividends, gains on stocks, shares and other investments. It is taxed at rates of 19 percent (up to €6,000),21 percent (€6,000 to €50,000) and 23 percent (over €50,000),” Patrick MacDonald of Finance-Spain told The Local.
“If taken annually this can have a detrimental effect on your savings and investments.
“However, a person can shield themselves from the eroding effect of this tax and benefit from compound interest by wrapping their investments in a Spanish Compliant Bond.”
Not filing your tax return properly or in time
Self-employed people and SMEs that wrongly declare food, clothing and other personal or travel costs that are unrelated to the job face fines from Hacienda, Spain’s tax agency.
The same can be said for any number of mistakes in quarterly or annual tax returns, or if they are not completed in time.
There are filing deadlines for non-residents and generally they have to report income and pay taxes every three months, except for deemed income from a property which is due on December 31 of the following year.
Depending on whether Hacienda considers your tax breach to be light or severe, the penalties can vary enormously. If you hand in your papers late but voluntarily you can expect a lower fine than if there’s a tax inspection of your affairs.
The best bet is to enlist the help of a gestor, something which most self-employed Spaniards and companies do already, if you want to get a heads up about deadlines and any mistakes you may have made on your tax return.
READ ALSO:
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