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How Spain’s new millionaire tax will affect wealthy foreigners

Spain’s new 'solidarity tax' on millionaires is making headlines. Here's everything you need to know about it, from who will pay it, to how much it is and whether it will affect wealthy foreigners in Spain.

SPAIN-MILLIONAIRE-TAX
A man drives a car in Marbella's glitzy Puerto Banús marina. Spain's millionaire tax is one of the measures implemented by the government to achieve more progressive taxation outcomes. (Photo by JORGE GUERRERO / AFP)

In an attempt to help people in Spain weather the economic storm of the cost-of-living crisis, the country’s left-wing government is set to slap a new tax on people with net fortunes of more than €3 million.

Coming into effect in 2023 and remaining in place in 2024, the so-called ‘solidarity tax’ (impuesto solidario) has been labelled “temporary” and will be paid by just 23,000 people, or 0.1 percent of total taxpayers in Spain.

According to the government, it will raise €1.5 billion in revenue.

The tax is not a tax on income, but rather on assets and holdings.

In the Spanish press, the new tax has been described as a tax on “big fortunes”, and it will be deductible from Spain’s pre-existing wealth tax.

“Since we began governing, we have been working to make our fiscal system more progressive, efficient and strong enough to support social justice,” Minister María Jesús Montero explained to the Spanish press last Thursday.

The new tax on assets is about “asking for a greater effort” from taxpayers with higher incomes, Montero said.

How will Spain’s new millionaire tax work?

The new solidarity tax is not a flat rate but a progressive one based on the level of wealth. Those with assets worth between €3 and €5 million net will pay 1.7 percent; those with assets worth between €5 million and €10 million will pay 2.1 percent; and those with assets over €10 million will have a tax rate of 3.5 percent.

The Spanish government has not clarified exactly what that percentage will be applied to, but if the pre-existing wealth tax is anything to go on, the millionaire tax applies to the amount above the aforementioned thresholds.

For example, if an individual who is a resident in Spain has €3.5 million in worldwide assets, then they will likely pay 1.7 percent on the €500,000 which is above the €3 million threshold. If they have €7 million, then they will pay 2.1 percent on the €2 million extra that’s above the €5 million threshold.

According to government sources, as the new solidarity tax is deductible from the wealth tax, in practice it will only be included in the tax calculations of regions where the wealth tax has been scrapped or cut, ensuring that no taxpayers pay twice on the same assets.

Why is Spain’s millionaire tax really being implemented?

In Spain, regional governments have the power to increase or decrease certain tax rates.

In right-wing controlled regions, tax cuts have been made for the wealthy in recent weeks.

This approach, Montero said, amounts to unfair ‘tax dumping’ and fiscal ‘populism’ made with an eye on upcoming elections, and many in Spain feel that the new millionaire tax aims to cancel out such regional tax cuts for the rich, as in the case of Madrid and Andalusia where wealth tax has been scrapped entirely.

READ MORE: How Spain’s politicians are waging a tax war ahead of 2023 elections

What does the new millionaire tax mean for wealthy foreigners in Spain?

Spain is one of only a few countries in the world that has a wealth tax for both residents and non-residents, with the threshold set at €700,000 and the tax rising progressively from 0.2 percent to 3.5 percent. 

In Spain, residents with this level of wealth pay tax on their worldwide income and assets, whereas wealthy non-residents pay tax on their Spanish assets.

Keep in mind again that Spain’s regional governments are at liberty to reduce this wealth tax or exclude certain assets such as primary homes from the calculation. Non-residents who are either EU or non-EU nationals are also able to use more favourable regional wealth tax cuts.

So, will this new millionaire tax apply to residents and non-resident second homeowners in Spain with assets above €3 million?

For residents, it will likely depend on where they live in Spain. If they reside in a region which has cut or slashed wealth tax (such as Madrid, Andalusia, Galicia and Murcia) the new solidarity tax will be factored into their tax responsibilities. If they live in a region where the pre-existing wealth tax is the same as Spain’s national wealth tax, they will not pay the new millionaire tax.

For non-residents, it is unclear yet whether the new tax will apply to them as the law is not in force yet and Spain’s state bulletin, together with all the details, has not been published yet. The pre-existing wealth tax does apply to non-residents with properties and other Spanish assets with a value above €700,000, so if they have said assets in a region such as Andalusia or Madrid that’s scrapped the pre-existing wealth tax, they may well have to pay the new solidarity tax.

Other measures

The millionaire tax is just one measure implemented by the government to achieve more progressive taxation outcomes. There are also plans to increase the income tax rate from 26 percent to 27 percent for people earning more than €200,000 per year.

Capital gains tax for incomes above €300,000 will also be increased by 2 percent, rising to 28 percent.

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The tax changes in Spain in 2023 that you need to know about

The new year in Spain has brought with it a whole raft of new tax measures and changes that you should be aware of. Here's all you need to know.

The tax changes in Spain in 2023 that you need to know about

There are a number of new tax measures or changes to the existing system coming into force in Spain in 2023, while other temporary taxes from 2022 have been maintained.

Here are all the changes you need to know about and how they could affect you.

IRPF

This year, the Ministry of Finance will change the way they calculate the amount of Impuesto de la Renta para las Personas Físicas (IRPF) or personal income tax, you have to pay. 

In total, more than 250,000 workers will benefit from the changes and in some cases, will save more than €1,000 per year.

The government has also raised the minimum exemption from €14,000 to €15,000 to help the most vulnerable in Spanish society.

READ ALSO: Who in Spain will save €1,000 in 2023 thanks to income tax changes?

New pension fund tax

From January 1st 2023, all workers in Spain, whether salaried or self-employed, must pay a new tax through their social security contribution to help fill up Spain’s pension fund – a move that will affect over 20 million workers.

The Intergenerational Equity Mechanism (MEI), as it’s known, will be a small social security contribution intended to help balance pension financing between generations. It is hoped that the MEI will bring in around €22 billion by 2032, when it is anticipated the new tax will be lifted. 

In simple terms, if you work in Spain and thus contribute to social security, the new tax will represent 0.6 percent of your monthly salary, however, of this 0.6 percent your employer will pay 0.5 percent and you will only pay the other 0.1 percent.

READ ALSO: The new tax all workers in Spain will pay in 2023

Wealth tax

The Spanish government will maintain its so-called ‘wealth tax’, but there will be certain changes to it this year. The tax targets those with fortunes of €3 million or more.

Three brackets that have been established are a rate of 1.7 percent for fortunes between €3 and €5.3 million, 2.1 percent for wealth between €5.3 and €10.6 million, and 3.5 percent for fortunes over €10.6 million.

Savings tax

Large savings and capital income will also be taxed at a higher rate in Spain in 2023.

For taxable income over €200,000, the rate will be increased by one percent, from 26 percent to 27 percent. In addition savings of €300,000 or more will be taxed at 28 percent.

Self-employed workers

The Local covered the ongoing changes to tax system for autónomos (self-employed people) throughout 2022, including the main change that social security contributions will now be based on real income, instead of a set amount each month. 

The government has also rejigged the thresholds, but essentially anyone earning under €1,300 per month will be paying less in social security fees, with those earning €1166.70 to €1,300 a month paying just €3 less than they do now.

Those earning between €1,300 and €1,700 will pay the same amount as they do now – €294 per month, while anyone earning over €1,700 will be paying more.

According to the government, of the three million self-employed workers in Spain 2.4 million earn under €1,700 per month, meaning that the majority will see their social security contributions staying the same or reduced.

Self-employed workers in Spain will now have to choose an income bracket based on a projection of their annual net income according to a general table of base levels set by the government.

It’s as complicated as it sounds, with some accountants even unclear on exactly how this will work, but from what do know in 2023 there will be 15 different brackets of net income to calculate your social security contributions.

Tax breaks 

Several regions have announced various tax breaks for 2023, most notably Madrid. From Q1 2023, new autónomos in Madrid will have their social security fees paid for by the government for their first year of self-employed work in the region.

Recently the region also announced that it would offer tax breaks to draw foreign investment. Under the regional plan, foreigners or expatriate Spaniards will be able to deduct 20 percent of the value of their investments in real estate or financial assets from their income tax bill.

READ ALSO: Madrid region offers tax break to draw foreign investment

VAT

The Spanish government is also keeping its VAT cuts (known as IVA in Spanish) on various products. VAT on feminine hygiene and contraceptive products has been cut from 10 percent to 4 percent, as well as the temporary tax reduction on basic foods such as bread, flour, fruits or vegetables, which will be taxed at 0 percent, and to oils and pasta, which now have VAT rates of 5 percent.

These cuts are expected to last for six months.

READ ALSO: Spain axes VAT on basic foods to ease inflation pain

Banking and energy

The headline-grabbing tax measure in 2023 is a carry-over from 2022: a temporary windfall tax on banks and energy companies designed to bring €3.5 billion in extra revenue per year to help deal with the ongoing inflationary crisis.

Energy companies, whose profits have benefited hugely from the energy crisis, will have their excess profits taxed. This will generate around €2 billion per year for state coffers, and the tax will be levied at 1.2 percent on gross income for energy companies that make more than €1 billion a year.

Similarly, there is also a temporary 4.8 percent charge on banks’ net interest income and commissions in 2023 and 2024 to fund measures to ease cost of living pressures.

READ ALSO: Spain to slap windfall taxes on banks, energy firms

Plastic tax

A new tax on non-reusable plastics is also being introduced, approved at a rate of €0.45 per kilo of single-use plastic. A study by International Financial Analysts (AFI) estimates the plastic tax could generate €300 million for the Spanish state coffers.

The tax comes as part of Spain’s Waste and Contaminated Soils Law being brought in to try and decrease the use of single-use plastics, and to reduce the waste produced in landfills by 15 percent compared to 2010 levels.

READ ALSO: How Spain’s new tax on plastics will affect you

The Spanish government hopes to cut the use of food containers and single-use plastic cups by up to 70 percent by 2030.

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