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TAXES

Why you should move to this region in Spain if you want to pay less tax

There's a region in Spain where residents pay less tax on their income, assets, inheritance and property transactions, with conditions that are especially beneficial for high-income earners.

Why you should move to this region in Spain if you want to pay less tax
Wealth tax in Madrid is zero whereas inheritance tax is very low as well. Photo: Gabriel BOUYS / AFP

Madrid, slap bang in the centre of the Iberian Peninsula, may not have the allure coastal towns and cities have for foreign residents, but it’s long been regarded as the best place to live in Spain if you want to pay less in taxes. 

Under the leadership of the divisive Isabel Díaz Ayuso – who during the Covid-19 pandemic has preferred to keep businesses open rather than impose restrictions in the face of rising infections – Spain’s capital has consolidated this image as the country’s less tax burdensome city and region. 

Since the late 90s, Spain’s regions have been able to modify their taxes by exerting influence on the central government; some such as Catalonia preferring to raise them, others like Madrid opting to lower them. 

Regional governments have consistently complained that Madrid has an unfair advantage in this regard as it houses all national governmental departments and around 3 million civil servants, labelling it a tax haven and a hotbed for fiscal dumping as many savvy Spaniards have opted to move their fiscal address to the capital.

Do people in Madrid really pay less in taxes?

This feeds into the debate over whether Madrid really is the region where residents pay less in taxes, and if it comes at the cost of being an underfunded region in terms of public spending.

The general consensus is that Madrid is among, if not the top region, with the most lenient tax system in the country. For high-income earners, Madrid’s tax laws can be particularly beneficial, as we’ll detail below. 

But for critics of Ayuso and her right-wing Popular Party, which has been in power in the capital for the last 25 years, lowering taxes has meant less investment in public services and greater inequality.

That doesn’t mean that Madrid’s preference for a more privatised and liberal economic model isn’t fiscally beneficial to low-income earners, but they may have to consider whether the higher cost of living in the capital and generally lower public spending is worth it overall.

Which taxes would I pay less of if I moved to Madrid?

Income tax (impuesto sobre la renta, IRPF): Madrid residents are the people with the most favourable income tax rates in Spain, especially those who earn more than €100,000 a year, according to stats by Spain’s General Council of Economists (Reaf).

However, because Madrileños generally earn more, more people fall into the higher tax salary brackets thus they end up paying more on average in IRPF than other workers in Spain.

Spain’s income tax is a state tax, 50 percent of which is ceded to the regions, who have the ability to fix half of the tax scale and establish some deductions. 

Ayuso’s government has agreed to lower the taxation rate further still for each salary bracket in 2022, although this will see those with yearly earnings between €12,500 and €17,700 save only €4 a year whilst for those earning €33K to €53K could save as much as €165 a year.

For self-employed people, the savings could be even greater, with mid-income autonómos to pay on average €300 to €500 less in taxes every year than the national average. 

Madrid regional president Isabel Diaz Ayuso has consistently opposed Spain's national government on the matter of raising taxes in the capital. Photo: Javier Soriano/AFP
Madrid regional president Isabel Diaz Ayuso has consistently opposed Spain’s national government on the matter of raising taxes in the capital. Photo: Javier Soriano/AFP
 

Inheritance tax (impuesto de sucesiones y donaciones): Contrary to popular belief, Madrid does have an inheritance tax, but it’s 99 percent deductible. 

That makes the capital by far the best region in Spain in terms of inheritance tax, as although there are other regions such as Cantabria and Galicia which have eliminated it in recent years, Madrid consistently keeps this tax very low.

Wealth tax: This, as is the case with inheritance tax, an impuesto (tax) that’s fully in the hands of the regions to decide. 

Spain’s wealth tax is a tax that both residents and non-residents must pay on their assets if they amount to more than €700,000. In Madrid, this tax is zero.

Tax the transfer of goods and rights (ITP y AJD): ITP is the acronym used to describe the tax that applies to the transfer of ownership of a second-hand property in Spain. It varies across Spain’s regions, ranging from 4 percent to 10 percent currently.

AJD is a tax that usually goes hand in hand with ITP, and corresponds to all the administrative and notarial processes that come with getting a mortgage in Spain.

These tax rates can change every year but in general Madrid’s are among the lowest in Spain.

Regional taxes: Impuestos propios (own taxes) are tariffs applied by regional governments to address matters pertaining to their community which they’re looking to solve. 

These can be taxes on anything from empty homes, to polluting vehicles or gambling.

On September 1st, Madrid’s regional president Isabel Díaz Ayuso made headlines by announcing she intended to scrap the remaining impuestos propios in the region (tax on slot and arcade machines in bars and restaurants and a tax on the storage of waste).

This won’t make a big difference to most people in the Spanish capital but it again represents the liberal attitude of Madrid’s government and its fiscal incentives.

Property tax (IBI): IBI stands for Impuesto sobre Bienes Inmuebles in Spanish, which translates to tax on property goods, but it also goes by the name SUMA.

It’s a local tax which has to be paid once a year by all property owners in Spain, and it serves as a benchmark to calculate all other Spanish property-related taxes. As the IBI amount is decided by the town hall in which your property is located, there can be big differences between municipalities.

Even though Madrid city’s IBI isn’t the lowest in Spain, it is among the ten lowest in the country and there are several deductions available.

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VISAS

Residency through passive income or pension: Is Spain or Portugal better?

Spain's non-lucrative visa and Portugal's D7 visa are both designed for non-EU citizens to be able to live in these Iberian countries and are ideal for pensioners, but how do they compare? Which is easier and offers more benefits?

Residency through passive income or pension: Is Spain or Portugal better?

Spain’s non-lucrative visa, also known as the NLV, is an authorisation that allows non-EU foreigners to stay in Spain for a period of more than 90 days without working or carrying out professional activities in Spain, such as retirees, by demonstrating that they have sufficient financial means. 

Portugal’s D7 visa provides residency status in Portugal to non-EU citizens, including retirees, who receive regular passive income. 

While they both sound similar at the outset, they are quite different when it comes to the requirements and what they offer.

Here’s a breakdown on Spain’s NLV vs Portugal’s D7. 

What are the income requirements?

NLV: For Spain’s NLV, in 2022 you must prove that you have a passive income of €27,792 per year. This number usually rises yearly as it must be 400 percent of the IPREM, so if you’re planning on applying in 2023, you’ll have to budget a little more.

READ ALSO: What are the pros and cons of Spain’s non-lucrative visa?

D7: For Portugal’s D7 visa, you only have to prove that you have 100 percent of the minimum wage which is currently €7,620 per year. Portugal wins hands down in this case as you’ll have to have at least €20,000 more per year if you want to move to Spain.

Can I include family members?

NLV: Yes, the NLV allows you to bring dependent family members such as a spouse and children, however, you will need an extra €6,948 per year for each family member included.

D7: Portugal’s D7 also allows you to bring family members, but again it’s a lot more affordable than Spain’s NLV. You can bring your spouse or your dependent parents for an extra €3,810 per year and your children for an extra €2,292 per year.

Can it be renewed?

NLV: The NLV visa is a one-year visa, but it can be renewed for a further two years and then another two years after that. After five years of residency, you are eligible to apply for long-term residency and won’t have to keep renewing your NLV.

D7: The D7 is initially valid for two years, unlike the NLV. Afterward, you’ll be able to renew it for an additional three years.

Can it lead to citizenship?

NLV: Yes, you can eventually apply for Spanish citizenship after 10 years, but you will need to apply for long-term residency first.

D7: Yes, after you have five years of residency, you are able to apply for Portuguese citizenship, this is half the time that it would take in Spain.

Do I have to pay tax?

NLV: Yes, if you stay more than 183 days in Spain you will become a tax resident and will have to pay tax on your worldwide income. It’s worth remembering, however, that there are double tax agreements with certain countries meaning that if your passive income has already been taxed in your home country, you won’t be taxed again in Spain.

D7: Like in Spain, once you have lived for more than 183 days in Portugal you are subject to paying tax rates there, however, Portugal offers a special Non-Habitual Resident (NHR) status, which you can apply for if you have a D7 visa. This special tax regime offers free incentives and reduced tax rates for some for their first 10 years in Portugal.

Can I work with these visas?

NLV: No, as the name suggests, it’s a non-lucrative visa and you shouldn’t be working in Spain, even if your employer is based abroad. After your first year though you are able to exchange it for a work permit or to become self-employed (autónomo) through a process called residence modification.

READ ALSO: Should I change my non-lucrative visa for another residency permit in Spain?

D7: Like the NLV the D7 is only supposed to be for passive income and you do not have the right to work in Portugal, however, if you later apply for a residence visa, then this restriction will be lifted and you will be allowed to work.

Do I need private healthcare?

NLV: Yes, you will need to apply for private health care in Spain in order to apply for the NLV. Surprisingly private healthcare can be very affordable in Spain at around €50-200 a month and the services are very good.  

D7: Portugal’s D7 also requires you to get private health insurance. Private health care in Portugal can be slightly cheaper than in Spain at between €50 to €100 per month.

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