Considerations for those thinking of relocating to Spain
Spain continues to be an attractive destination for high net worth individuals and, like the UK, Italy, Malta, Portugal and various other countries, it does have a specific tax regime targeted at attracting ‘inpatriates’. Royal Decree 687/2005, otherwise known as the “Beckham Ruling”, was a law passed in 2005 aimed at attracting skilled individuals to live in Spain. It gained its name after footballer, David Beckham, became one of the first foreigners to take advantage of it.
Prior to the introduction of this rule, any foreign workers remaining in Spain over 182 days in a tax year would become Spanish tax resident and subject to Spanish tax on their worldwide income and gains (subject to the applicability of a relevant DTA). Since the introduction of the Beckham Ruling, foreign workers employed by a Spanish company, or a Spanish branch of a foreign company, can apply for a ruling to be treated as if they were non-Spanish tax resident.
The effect of this is that the individual is only subject to:
- income tax at a flat rate of 24% on the first €600,000 of income earned in Spain;
- income tax at 45% on any Spanish income in excess of €600,000
- income tax at 35% on gains realised on the sale of Spanish situsassets (e.g. Spanish real estate); and
- net wealth tax on Spanish situs assets only.
The ruling is available to all foreign workers, although it is geared more toward wealthier expats (i.e. middle and upper management, those with specialist skills etc.). In order to benefit, however, a specific ruling application must be made. If the ruling is granted, it applies in the year of arrival and for the following 5 tax years (i.e. for a total of 6 years), during which time foreign income, gains and assets are not subject to Spanish taxation.
The regime is open to individuals who have:
- not been resident in Spain for the previous 10 years;
- apply within 6 months of registering with the Spanish Social Security system; and
- are employed in Spain.
What’s not to like?
Provided the individual can show that they are genuinely employed by a company that they do not have more than a 25% interest in, rulings are granted relatively quickly (in our experience within 30 days). The benefits are significant in respect of non-Spanish source income/gains and are time limited. If the individual intends on staying in Spain past 6 years, planning will need to be undertaken to take account of the following:
Trusts: The concept of a trust is not recognised by Spanish law and there is a presumption of tax fraud / evasion when one is unearthed by the authorities.
Modelo 720: all residents of Spain must make an annual declaration of all non-Spanish assets valued at more than €50,000 (property, bank accounts and investments). Non-disclosure results in significant penalties.
Inheritance Tax: Spain doesn’t have a blanket spouse exemption for inheritance tax purposes. However, individuals that have been resident in Spain for at least 3 years receive an exemption of 95% of inheritance tax when their principal residence or family business (in Spain) is left to a spouse, parent or child who has been living with them for at least two years before their death. Here’s the sting: the principal residence must be valued at less than €122,606 (there is no limit for a business) or the inheritance per heir must be less than €122,606, above which normal inheritance tax rates apply.
Wealth Tax: Spain re-introduced wealth tax in 2011. It is imposed on worldwide net wealth with each taxpayer entitled to a standard allowance of €700,000. The 17 autonomous regions are able to set their own tax rates and allowances within certain limits. If a region does not set such rates, the standard progressive rates range from 0.2% (on the first €167,129.45) to 2.5% (on the excess over €10,695,996.06).
There are limited exemptions for shares in unquoted companies in which the taxpayer holds:
- more than 5% of the capital; and
- a managerial function which is the source of more than 50% of his total income.