| The Main types of Taxes in Spain |
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Main types of Taxes in Spain
Corporate tax Corporate (or company) tax applies to companies only (not sole traders or the self-employed, unless they’ve formed a company). It’s known as Impuesto sobre Sociedades and is levied on any company which is resident in Spain for tax purposes, which means that it was incorporated under Spanish law, or that its registered office is in Spain or that its management headquarters are in Spain. The government is keen to encourage foreign companies to operate in Spain and so company taxation laws have recently undergone a series of changes designed to make their set-up simpler. There are also considerable tax incentives for small and medium-size companies. If your company is incorporated in Spain, it will be taxed on all its worldwide profits, earned and unearned, including income from investments and asset transfers, at a rate of 35 per cent. However, if you qualify as a small or medium-size company, you will pay a reduced rate of 30 per cent and if you happen to set up a business in the Canary Islands, you will benefit from their special company taxation system and may only have to pay between 1 and 5 per cent corporation tax, depending on whether you comply with the required conditions. It’s advisable to get an experienced firm of accountants (asesoria fiscal) to complete and submit your corporate tax returns. Corporation tax must be paid within 25 days of the company’s Annual General Meeting, which must be held within six months of the end of the fiscal year (31st December).
Tax on Economic Activities If you have your own company, are a sole trader or are self-employed, you will have to pay not only your own personal income tax but also possibly a tax on your economic activities, and all Spanish companies – but not the self-employed and sole traders – must pay corporation tax. Spain levies a ‘tax on economic activities’ (Impuesto sobre Actividades Económicas/IAE), which must be paid by businesses, self-employed workers and professionals with an annual turnover of more than €1 million. It used to be a local tax but now comes under the jurisdiction of the national tax authorities. The IAE is levied annually, irrespective of the type or size of your business. Because of the turnover limit, introduced in 2003 to encourage the set-up of small businesses, most businesses don’t have to pay this tax; however, whatever your turnover, you must register for IAE, as your business or profession must have a tax category and a code number (epigrafe), which are assigned when you do so . IAE is likely to be replaced by another tax in the not too distant future, not least because local councils have lost a considerable amount of revenue since the introduction of the turnover limit.
Personal Income Tax Employee: If you’re a salaried worker, your personal income tax situation is relatively simple. There’s a ‘pay-as-you-earn’ system and your employer deducts the relevant tax contribution (called withholding tax) throughout the tax year, so that you should have nothing more to pay. Recent improvements in the system mean that this amount is calculated so that it matches as closely as possible your tax liability and allowances. Normally, even if you work for an employer, although income tax is deducted from your salary, you’re responsible for filing your tax returns, not your employer. The national tax agency calculates what you owe or what’s due to you and sends you a form (105) to check, sign and return; any refunds due to you are made before the end of April.
Self-employed: If you’re self-employed, you have different accounting and tax obligations from those of an employee. There are two types of self-employed tax ‘regime’. Go to the tax office nearest to where you plan to work and complete and hand in Form 037. This form is stamped by the tax office and will confirm how you pay your taxes.
If you’re a sole trader operating without a specific business entity (such as an SL or SA), you may have to begin paying taxes under the modulos system (this is decided for you by the tax office, and you have no say in the matter!). Under this system, the tax office assesses what your business income is likely to be and you pay tax on this amount each quarter, irrespective of your actual earnings, even if they amount to zero. The advantage of this system is that you don’t need to keep accounts or prepare VAT invoices and you simply submit an ordinary return at the end of the financial year.
Otherwise, you will make payments according to the standard system, known as direct estimation ( estimación directa), but this means you must make quarterly tax and VAT declarations and either operate a double-entry book-keeping system yourself or engage an accountant to do so on your behalf. At least with the direct estimation system, if you earn less you pay less. You can change from the modulos system to the direct estimation system after a year if you think it would be better for you.
Either way, you must pay the balance of the income tax you think you owe at the same time as you make your declaration. You can either pay the whole amount when you submit your form or 60 per cent with the declaration and the remainder by the following 5th November. You can take your returns to the tax office where you’re resident for tax purposes and pay there or file your return and pay direct from your account at any of the designated banks in the area. If you pay at the tax office, payment must be made in cash (watch out for muggers!). If no payment is due, you must still file a return.
Most self-employed people end up paying too much tax, as their quarterly payments are set at 20 per cent of earnings, and are due a rebate. If you think this will be the case, you can apply for a rebate at the same time as you submit your tax return. If you haven’t paid enough, you will be sent a bill for the difference!
Besides income and corporate tax, there are quite a few additional taxes that you might have to consider on your calculations. The following text gives you an overview.
Capital gains tax ( Impuesto sobre Incremento de Patrimonio de la Venta de un Bien Inmeuble) is payable on the profit from the sale of certain assets in Spain – and not only property. You must also pay capital gains tax (CGT) when you make a profit from the sale of antiques, art and jewellery, stocks and shares and property and businesses. When you’re buying property or a business, be very careful that the purchase price declared on the sale contract ( escritura) isn’t too low. Although, under-declaration is illegal, it has been common practice in Spain for the seller to have a very low value placed on the escritura, so that he pays as little CGT as possible when he resells it. However, this is beginning to change, as the authorities try to crack down on the practice and collect the tax owing to them. Don’t get caught in the middle. If you, as a buyer, accept a low declared value, you will find that you’re the loser. When you come to sell, and you appear to have made a larger capital gain than you have, you will be liable for more tax. Note, however, that you may not find anyone willing to sell you premises or a business if you refuse to compromise whatsoever on the declared value. Take advice from your lawyer (some of whom express surprise that this practice is so alien to foreigners!) in order to achieve a satisfactory compromise. There are a few situations in which you aren’t liable for capital gains tax. If you’re a resident of Spain and are 65 or over, you will be exempt from CGT. Residents below the age of 65 are also exempt from CGT provided that the property they’re selling is their principal residence, they’ve lived there for three years and they plan to buy another home in Spain within three years.
Known as Impuesto Extraordinario sobre El Patrimonio but usually referred to simply as patrimonio, this is a regional tax, which must be paid in addition to income tax (and at the same time) and is levied on residents and non-residents alike, although it affects non-residents differently. •Residents: If you’re resident in Spain, your liability is based on the value of all your worldwide assets, including property, vehicles, business assets, cash deposited in bank accounts, jewellery, stocks and shares and anything else which might contribute to your wealth. You must produce your year-end bank statements, showing any interest received and an average balance. •Non-Residents: Non-residents only have to declare their property and any assets in Spain butaren’t entitled to an allowance against wealth tax. The above tax rates apply.
Property Transfer Tax If you’re legally incorporating a business or buying a property, you will also be liable for a regional tax, known as Impuesto de Transmisiones Patrimoniales y Actos Jurídicos Documentadas, on the following types of transfer:
Stamp Duty Stamp duty must be paid when you sign any documents in front of a notaio (these are known as actos jurididicos documentales), which you must do if you’re incorporating your company or buying property and public deeds or registry office documents are involved. The rate varies according to the kind of transaction and the autonomous community but is usually between 0.5 and 1 per cent.
If you’re self-employed or own a business, you must register for value added tax ( Impuesto sobre el Valor Añadido/IVA), irrespective of your turnover. Value added tax (VAT) applies in all of mainland Spain and the Balearic Islands, but not in Ceuta and Melilla, nor in the Canary Islands, where a lower sales tax applies. The standard rate of VAT is 16 per cent, although there are reduced rates for some items. Certain things are exempt from VAT, such as the rental of private property, exports, insurance and financial services. The transfer of a business is exempt from VAT, provided the buyer is going to continue the existing business. VAT is applicable to goods purchased outside Spain and, if you’re supplying goods or services, you must add VAT to all your invoices. You must register for VAT with the tax authorities at the same time as you apply for your tax identification number (CIF). This number must appear on all invoices for services or goods that you provide, of which you should keep copies for inspection, along with records of any VAT that you’ve paid on purchases. You’re obliged to keep detailed accounts and file a quarterly VAT return – unless your business has an annual turnover of more than around €6 million, in which case you should file a monthly return. As in other countries, you may be offered goods and services net of VAT, provided you pay in cash. Not only is it illegal to do so but, if you’re VAT registered, there’s no advantage, as you can reclaim the VAT.
Other Taxes
Spanish property tax ( Impuesto sobre Bienes Inmeubles Urbana/Rustica or simply IBI) is a local tax, similar to council tax or rates in the UK. It’s payable by resident and non-resident owners and is used for local services such as street and beach cleaning, education, cultural and sports amenities and local council administration. IBI is payable on commercial as well as residential property but, if you rent your business premises, the landlord should pay it for you – make sure this is specified in your rental contract. Check when you’re buying property or business premises that there aren’t any outstanding taxes to pay. If there are any unpaid taxes, you, as the new owner, become liable for them. Note, however, that it’s now obligatory for the seller to produce his last IBI receipt, proving that his taxes are up to date. When you buy a property, you must register your ownership with the local town hall within two months of signing the contract and you can be fined if you don’t do this. Local authorities have become tough on those who don’t register because, until fairly recently, they were losing a tremendous amount of potential revenue from undeclared and untaxed properties. Your IBI is based on what’s called the valor catastral, which is similar to a rateable value and is usually around 70 per cent of the market value, but this varies considerably with the local authority. The value is calculated according to the size and general assessment of the property (whether it’s considered ‘luxury’, ‘normal’ or ‘simple’) and how close it is to services, amenities and roads. Rates are generally higher in coastal and resort areas than inland, as services are usually better. The tax rate is usually 0.5 per cent of your valor catastral for urban properties and 0.3 per cent for agricultural properties, but make sure you check this, as rates are set locally and can vary considerably according to the local government’s expenses (and debts!). Pay a visit to your local town hall and find out what you should have to pay and when. Some send out bills, but many don’t, and it’s your responsibility to make sure this tax is paid by the due date. It’s prudent to set up a direct debit to authorise your bank to pay the tax when it’s due so that you aren’t caught out. If it isn’t paid on time, surcharges will be applied: usually between 10 and 20 per cent plus interest and collection costs, depending on how late the payment is. Some town halls have a system of discounts to encourage residents to pay their bills early. If you live in an area with a large foreign population, your town hall may have a Foreigners’ Department which can advise you, in your own language, about the best method of payment. Payment dates vary with the local council, but you usually have two months in which to pay a bill. If you haven’t set up a direct debit, you must usually take a cash payment to the tax collection office, although you can sometimes pay by bank draft or credit card. Check the acceptable payment methods before you go.
‘Rubbish and drains’ ( basura y alcantarillado) is an annual tax payable by both resident and non-resident property and business owners. It’s usually separate from IBI and it varies according to the size of the property or business, the location and the amount of rubbish that you produce. Expect to pay between around €150 and €200 per year.
You must also pay a tax on the increased land value since the last sale. This depends on what you buy and how long it is since the last sale. The official value of the land is always lower than the market value and you can find out how much this tax might be by going to your local tax office, where there are records for each property and staff can tell you what the assessed value of the land is.
Tax declaration If you have any kind of income in Spain – whether you’re a salaried employee or self-employed, own a business, are retired or are unemployed, and whether you’re a resident or non-resident of Spain – you must submit a tax declaration. There are a few exceptions to this rule. For example, you don’t need to declare if you’re a salaried employee earning less than a certain maximum. However, you should still keep detailed records of all earnings and check with the tax office or a financial adviser that you don’t need to declare. If your earnings are above these levels, you must make a declaration – and the responsibility lies with you and your advisers. No one will send you a form; you must obtain one from the tax office or from a tobacconist’s ( estanco), where they’re sold for a few cents.
There are three types of form; an abbreviated declaration ( declaración abreviada), Form 103, which is used if you need to declare earnings from pensions or investments that have already been subject to withholding tax; a simple declaration ( declaración simplificada), Form 101, which must be used if you have income from letting, certain business and agricultural income or capital gains from the sale of a permanent home where the total gain is to be reinvested in another property in Spain; an ‘ordinary’ declaration ( declaración ordinaria), Form 100, which is for all sources of income other than the above and covers all business and professional activities and capital gains. Unfortunately, for most people trying to make a living in Spain, this form – 13 pages long and the most complicated of the three – is the one that’s required!
However, help is at hand, either from your tax adviser or from the tax office in the form of an innovative computer programme called the Personal Income Tax Return Help Progamme ( Programa de Ayuda a la Declaración del Impuesto sobre la Renta de las Personas Fisicas/PADRE), which is the result of a major effort on the part of the tax authorities to help you declare your tax correctly. (They claim that it’s “a simple, secure and trustworthy system, because it was written by the Tax Agency itself”!) To use the PADRE system, you can go to the tax office, where staff will help you to enter your information into the computer programme, which runs on the Windows operating system. Because the tax office is keen to promote the system, if you use it for your declaration, you will be first to receive any refunds that are owing to you. However, don’t just turn up at the tax office. You must phone (901 223 344 and make an appointment to see a specific member of staff. In areas where there are large numbers of foreign residents, there may be a member of staff who speaks English, but don’t depend on it. When you go to the tax office for your appointment, you should take along your bank statements showing interest received and your average balance; any papers relating to stocks, shares, bonds and any property that you own in Spain or abroad; any declarations and receipts for taxes paid in another country; and, of course, those vital documents, your passport, residence permit and NIE certificate You can find a fuller explanation of the PADRE system in English on www.aeat.es/agencia/memorias/02/ingles . If you can’t face the tax office, you may find that your bank has the PADRE programme and can enter your information via their computer, in which case a member of their staff should help you to make your declaration. However, if your tax position is complicated or if you prefer expert and independent help, it’s best to consult a tax adviser. Many of them have access to the PADRE programme and charge around €35 for a simple tax return and around €60 for a more complicated one.
The Spanish tax year runs from 1st January to 31st December, and employees must submit their declarations between 1st May and 20th June of the following year, although if you think you’re entitled to a refund, this deadline is extended to 30th June. You pay your income tax in arrears, so for income earned in 2005, you would declare between those dates in 2006. The self-employed must make quarterly declarations. Late payment, even by a day, will incur a surcharge, usually of 20 per cent, although you can officially request a payment deferral. If you have an adviser taking care of your tax affairs for you, check that he pays on time and gets receipts for payments. If he doesn’t do this, it will be you that’s liable for the penalty. You should keep copies of your tax returns for at least five years, which is the maximum period that returns are liable to be audited by the tax authorities. After five years, any unpaid tax cannot be collected. |