Spanish Taxation Overview: Income Tax, Inheritance Tax, and IRPF
INCOME TAX
Directness, Personal, and Subjective Nature
Objective: Charged on corporate income and other legal entities.
Scope
Applies throughout the Spanish territory.
Chargeable Event: Source of income, whatever its source or origin, by the taxable person.
Allocation of Income
- Civil societies, whether or not they have legal personality.
- Vacant inheritance: Succession that can be tested or intestate.
- Community-Civil society of assets.
Liable Subjects
- Legal entities, other than civil societies with income under special arrangements.
- Investment funds and joint ventures.
- Venture capital funds.
Taxpayers will be taxed by all the income derived, regardless of where it occurs and the payer’s residence and fiscal residence.
- Entities with their head office in Spanish territory.
- Entities whose head of effective management is in Spanish territory. Their registered office will be considered their residence. Otherwise, the place where such management is carried out or the address will be considered. However, the established place of residence for tax purposes will prevail if it has the highest value of fixed assets.
Exemptions
The following are exempted from tax:
- The State, autonomous communities, and local public administrations.
- The Bank of Spain, deposit guarantee funds, and investment guarantee funds.
- The agencies administering Social Security.
- The Institute of Spain and the Spanish Royal Academy.
Entities and non-profit institutions, foundations, unions, mutual accidents, professional parties, associations, and political parties will be partially exempt.
Corrections of Value: Depreciation
Depreciation is effective:
- Based on the coefficients of linear depreciation amortization tables set out in officially approved documents.
- Calculated by applying a constant rate to the outstanding value of depreciation using the method of the digits.
- Adjusted to a plan formulated by the taxpayer and accepted by the tax authorities.
- Substantiated by the taxpayer.
Non-Deductible Expenses
The following are not considered tax-deductible expenses:
- Pay equity.
- The share of corporate income tax. (CT is a deductible expense for accounting purposes but not tax purposes)
- Fines, criminal charges, and administrative surcharges.
- Gambling losses.
- Gifts and donations. (Expenses that are not necessarily essential for the company)
Criterion: Accrual criterion for inventory valuation (FIFO, LIFO, etc.) is accepted.
Tax Period
The tax period ends:
- When an entity becomes extinct.
- When there is a change of residence of the Spanish company established in foreign territory.
- When the legal form of the entity is transformed and it is determined that it is not subject to the entity tax.
Tax Rate
The tax rate is 30% (reduced to 25% in certain cases).
Comprehensive Fee
The amount calculated by applying the tax rate to the tax base.
SUCCESSION
Territorial Scope
This is a tax (tribute) to the Autonomous Communities (CCAA) given both the collection, management, and control. Subject to appropriate legislation by the central state. In taxation, it is the responsibility of the state. The State enables the CCAA (Act 21/2001).
Taxable Transactions
- Procurement of goods and rights of inheritance.
- Inheritance: Mortis causa property and rights acquisition.
- Acquisition by donation or other legal business for free, inter vivos.
- Property and rights on grant amounts.
- Perception by the beneficiaries of insurance contracts on the life of the insured (life insurance beneficiary) gratuitously.
Taxable Persons
- For acquisitions mortis causa.
- For-profit grants and other international broadcasts inter vivos.
- In life insurance, the beneficiaries.
- The fully taxable personal habitually resident in Spain.
- The fully taxable real estate acquired in Spanish territory.
Taxable Base
Estates
Real value of acquired property and rights – deductible loads:
- Temporary or perpetual charges that actually diminish the value of the property.
- Mortgage debts actually recorded on these assets.
Non-deductible liabilities: Accounts payable for taxes, social security, etc.
“Last illness expenses” are deductible (burial expenses).
Donations (Inter Vivos)
Real value (real and vested) – deductibles.
Debts and deductible burdens: With real rights that fall on the same property conveyed.
Life Insurance
Amounts received by the beneficiary.
Reason: To avoid inequalities.
Determining the Basis
The tax administration determines the basis under the direct estimate with no exceptions other than those identified here. The inheritance and gift tax only considers input, not output. The input value is determined as the taxable amount; the amount of profit made for profit. The problem lies in the valuation of assets.
Reductions
First, the state applies reductions, and then the Autonomous Communities.
Mortis Causa (Including Life Insurance)
- Reduction by degree of kinship:
- Group I: Procurement by descendants and adopted children under the age of twenty.
- Group II: Acquisitions by descendants of twenty or more years, spouse, ascendants, and adoptive parents.
- Group III: Acquisitions by relatives in the second and third degree.
- Group IV: Procurement by relatives in the fourth degree.
- Reduced handicap for the beneficiaries of life insurance, property, and rights.
- Reduction for an active business person, based on business value, provided it is not merely possession of property or a portfolio.
- Acquisition of a single residence.
Inter Vivos
- For the purchase of a residence or donation of the house.
- “Transfer of shares, for the spouse, descendants, or adopted children, of an individual company.”
Chargeable Event
The tax shall be payable on the death of the deceased or the insured or when a firm declaration of death of the absentee is made.
IRPF (Personal Income Tax)
Taxable Transactions
This is the collection of income tax based on the taxpayer’s income. Components:
- Earned income.
- Return on capital.
- Yields from economic activities.
- Gains and losses of income.
The charges are established by law for the determination of taxable income and tax calculation. Income is classified as general and savings income. It is presumed, unless proven otherwise, that the supply of goods, rights, or services is capable of generating income from labor or capital.
Exempt Income (Examples)
- Aid for AIDS education.
- Scholarships.
- Prizes for literary, scientific, and artistic achievements.
- The Red Cross Award pools.
- State gold bullion.
Taxpayers
- Individuals who have their habitual residence on Spanish territory.
- Individuals having their habitual residence abroad for some of the circumstances referred to in Article 10 of this Law (e.g., Members of Spanish diplomatic missions).
Methods of Determining the Taxable Base
- Estimated direct.
- Estimated performance targets for certain economic activities.
CLASSIFICATION OF INCOME
Personal Income from Work
Includes:
- Salaries and wages.
- Unemployment benefits.
- Remuneration for representation expenses.
- Per diems and travel allowances.
- Contributions paid by pension plan developers.
- Contributions paid by employers to meet pension commitments.
Returns to Capital
Includes:
- Real estate income from both rustic and urban properties that are not affected by economic activities undertaken by the taxpayer.
- Income from capital and, in general, from other property or rights held by the taxpayer that are not assigned to economic activities.
Yields of Capital – Real Estate
The assignment of any right in immovable property in exchange for a fee, either in money or in kind (e.g., usufruct, rent).
- From the ownership of rural and urban real estate or real rights that fall on them, all income derived is considered.
- Full performance is computed as the amount payable by the purchaser (excluding VAT).
Investment Income (Renta de Ahorro)
- Property and economic rights.
- “The returns that come from my funds transferred to third parties.”
- The resources obtained from participating in the equity of entities.
Two types of remuneration: Equity and capital.
Income: Performance is not the same as profit.
Expenses: Postage and custody.
Deductible Expenses and Reductions
- Management of reservoirs and securities.
- Impairment suffered by property or rights from which the revenue comes.
Efficiency of Economic Activities
Any compensation received from a person who has control and decision-making power over the means of production (employees, workers) as an individual entrepreneur.
Leasing of real estate is considered an economic activity if:
- There is a local space for carrying out the management of the activity.
- A person is employed by contract on a full-time basis.
Capital items pertaining to economic activity are considered to be:
- Properties where the activity is developed.
- Property used for economic and cultural services for staff involved in the activity.
- Any other capital items necessary for obtaining the respective yields.
The following will take place:
- Direct Estimation (BI)
- Objective Estimation
Allocation of Income
- Allocation of income in international tax transparency regimes.
- Allocation of revenue from the sale of image rights.
- Taxation of partners or participants in investment institutions collectively incorporated in countries or territories considered tax havens.
Assessment of Income in Kind
Based on its normal market value, with the following specifications.
General Income (Renta General)
Yields and gains and losses that are not considered savings income.
Savings Income (Renta de Ahorro)
- Investment income.
- Gains and losses that are revealed during the transmission of assets.
Taxable Amount
The general taxable income (BI) is:
- The balance resulting from integrating and netting returns and complaints.
- The balance resulting from integrating and offsetting positive gains and losses, excluding those provided in the following article.
Reductions
Reductions are the minimum amount that is not subject to tax. They are applied first to the general BI. If there is still a remaining amount, they are applied to the savings BI until it reaches 0. The BI can never be negative. This is called integration and income compensation. (Savings income is offset by the same type of income.)
- Reduced by contributions to social welfare systems.
- Reductions for disabled people.
- Reductions for contributions to heritage protection of persons with disabilities.
- Compensatory pension reductions.
Taxable Income
The general taxable income (BL) shall be the result of applying the previous reductions to the general tax base.
The savings BL will result from reducing the tax base of savings in the remaining amount.
The tax rate is progressive. There are progressive state rates and other payable autonomous rates.
Base: – State – Autonomous
Liquid Share
Deduction for double international taxation.
- The actual amount paid abroad for a tax identical or analogous to this one.
- The result of applying the average effective tax rate to the portion of taxable income taxed abroad.
Deduction for Motherhood
Women with children under three years of age, performing self-employed work, are entitled to a deduction of 1,200 euros per year per child under three years of age.
In the event of adoption or foster care, the deduction applies during the three years following the date of registration in the registry office.
Costs
- Salary, apartment, car.
- Social Security spending.
- Affiliation to unions.
- Legal defense for job-related matters.
Reductions
- Reductions apply when a person is over 65 years old.
- The reduction is greater if the person is disabled.
- Reductions may also be extended to unemployed individuals and those seeking work elsewhere.
Permanent Differences (Tax Deductible)
- Donations.
- Fines.
- Payments to equity (dividends).