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TAXES

Do I have to pay tax twice if I’m an American living in Spain?

If you're an American living in Spain, you may well have to pay taxes. But do you have to pay in both countries, and how does the system work?

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A person holds euro and US dollar bank notes. All US citizens as well as permanent residents are required to submit expatriate tax returns with the US federal government each year, regardless of the country they reside in. Photo: Omid Armin/Unsplash

If you’re a US citizen who has recently moved to Spain or will do soon, you’re probably wondering what exactly your tax obligations are and, crucially, whether you have to pay tax twice.

This depends on a multitude of factors, such as how long you spend in Spain, where your money comes from and what you earn, but you’ll be glad to learn that there are measures in place to stop people paying tax twice on the same income. 

And for those of you hoping to go under the radar, be warned that the American and Spanish governments have tax treaties, share taxpayer information between them, and Spanish banks even supply American account holders’ information to the IRS, so trying to avoid paying tax is not advisable.

That’s particularly true when there are harsh penalties for tax evasion in Spain.

Fortunately, agreements between the two countries include several exemptions that you can claim to prevent you paying tax twice on the same income.

Do I have to pay tax in Spain?

All US citizens as well as permanent residents are required to submit expatriate tax returns with the US federal government each year, regardless of the country they reside in. This includes a standard tax return as well as disclosing assets which are kept in foreign bank accounts.

How do I know if I’m tax resident?

That depends how much time you spend in Spain. If you are in Spain for more than 183 days a year, or Spain is your main base of economic activities, interests and incomes, you are considered a tax resident and have to pay taxes.

All Spanish tax returns are filed through the Agencia Tributaria, Spain’s tax office.

However, even non-residents still need to pay some taxes such as on property owned in Spain.

READ ALSO: How does Spain know if I’m a tax resident?

What is the Spanish tax year?

The Spanish tax year goes from January 1st to December 31st, and tax returns can be filed between April 6th and June 30th. Note that there is flexibility with regards to returning taxes if you are paying in both countries, and extensions can be granted while you wait for the all the right documentation.

Do I have to pay double?

While those who reside in Spain for more than 183 days a year must pay tax in Spain, all US citizens and US permanent residents (wherever they are in the world) are also required to file an IRS tax return in the US and pay taxes. 

Fortunately, the double-tax treaty prevents you paying tax on the same income twice.

The way it does this is through a clause that allows for US tax credits to be claimed after a tax return has been filed to the IRS, as long as it’s equal in value to the income tax they’ve already paid.

Similarly, for Americans living in Spain with income streams from the US, Spanish tax credits offset the taxes they’ve already paid to the IRS.

This ‘double tax’ clause, as it’s known, is to prevent people paying more tax than the higher of the two countries’ tax rates.

READ MORE: Do I have to register and pay taxes in Spain if I’m a remote worker?

What about other sources of income?

Many people have other streams of income, of course, and the rules are slightly different depending on what it is. Under Spanish tax law, you must declare all ‘worldwide’ income, regardless of what it is.

Dividends

If dividends are paid by a company in Spain to a resident, it is the other contract state that gets to tax the dividends (the US, in this case) and they can still be taxed in the other country but only up to a limited amount of tax. 

Dividends taxation is particularly complex, so it is recommended to be speak with an accountant.

READ ALSO – Self-employed in Spain: What you should know about being ‘autónomo’

Real property income

Article 6 of the United States- Spain Tax Treaty states that income made by a Spanish resident from U.S.  property can be taxed in the US, and the reverse would be true too.

Interest

With regards to interest tax, interest earned in Spain which arises from the beneficial ownership for a person in the other contracting state (in this case the U.S) is only taxable in that other state.

Capital Gains

Gains from the sale of stock, participations, or other rights in a company or other legal property of which consists, directly or indirectly, mainly of real property situated in Spain, may be taxed in Spain.

In Spain, capital gains are taxed at 19% on the first €6,000 and at 21% for gains above €6,000. 

What if I missed the deadline?

Such a complicated process means that many may fall behind the tax return deadlines as they wait for documents from each tax agency to come through. Fortunately, Americans who find themselves in this situation avoid penalties through an IRS scheme called the ‘Streamlined Procedure’.

As with all tax matters, it is recommended you speak with a tax professional before filling out any returns – especially so when figuring out what you need to pay and where.

READ ALSO: A guide to completing Spain’s annual tax return

Conclusion

Very simply put, there is no straightforward answer. Do you pay tax twice? Yes, and no. If you are an American residing in Spain, you will have to pay taxes into and deal with the respective tax agencies of both countries.

However, tax credit clauses included in the tax agreements between Spain and the US mean that you can claim it back so you won’t actually pay tax twice on a single source of income.

As always, it is recommended to speak to a professional who is familiar with both the American and Spanish tax systems, and the double-tax treaty. 

READ ALSO: How Spain’s new millionaire tax will affect wealthy foreigners

Member comments

  1. Thank you for an excellent article. About a month ago I commented on another article, same topic. It seems as though this comes as a response. It’s an excellent presentation of a really tough, complicated subject. I appreciate your good work! And when I go back to the States, I’ll keep up the subscription.

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For members

TAXES

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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