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

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
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.

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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