Are you an American thinking of moving to Spain? Do you know what tax advantages Andalusia has?
For American expatriates living in Spain, navigating the complexities of taxation can be both challenging and crucial to their financial well-being. From understanding which income streams are taxable to determining eligibility for deductions and credits, the Spanish tax system presents unique considerations for expats from the United States.
Stay reading this blog and we will clear up your doubts.
Tax residence
Knowing whether or not you are a tax resident in Spain is the essential step in order to be able to discuss later on what kind of taxes you have to pay or not. Keep reading to find out more.
Definition of tax residency, what is it?
Tax residence is what identifies in which country we have to pay our taxes and helps determine how much we will have to pay. In other words, it is the country where we have “tax obligations”.
It is important not to confuse concepts. Being a tax resident is not the same as being resident in Spain… And you may ask yourself… What are you trying to say? Let me explain.
Being a tax resident will help the Spanish Tax Agency to know if you have to pay taxes in Spain. It may be the case that you are tax resident in Spain but not resident in Spain. And you will ask yourself again… How can that be?
To give you an example, imagine that you come from Ireland, you have lived in Spain for more than 183 days and then you have returned to Ireland to live. As one of the requirements to be tax resident in Spain is to stay more than 183 days in Spain, you would be tax resident in Spain and you would have to make some tax declarations but you would be resident in Ireland. We have given you a very trivial example but it can sometimes be a bit more complex.
How do I know if I am a tax resident in Spain?
According to the Spanish Tax Agency, an individual is a resident in Spanish territory:
- Persons who stay more than 183 days in Spanish territory, during the calendar year. To calculate how long a person must be in a country to be considered a resident for tax purposes, all the times they were absent will be counted, unless they can prove that they are officially living in another country (with a certificate issued by the tax authorities of that country).
- That the main core or base of their activities or economic interests is in Spain, either directly or indirectly.
- That the non-legally separated spouse and minor children dependent on this natural person habitually reside in Spain.
What taxes do I have to pay in Spain?
If you are a resident taxpayer, you will have to pay the famous IRPF or Personal Income Tax. With this tax you will be taxed on your worldwide income, having to declare in Spain all the income you have earned internationally, although there may be exceptions depending on the double taxation agreements between Spain and the country of origin of that income.
Double taxation treaty between Spain and the United States
The Double Taxation Agreement between Spain and the United States includes a “reservation clause” that allows the United States to tax its citizens and residents as if the Agreement were not in force.
If a resident of Spain pays taxes in the United States because of this citizenship-based clause, Spain does not allow an international double taxation deduction for personal income tax (IRPF). In such cases, it is the responsibility of the United States to avoid double taxation.
Here is an example provided by Spanish tax authorities:
If you are a US citizen fiscally resident in Spain and you receive a US pension as your sole source of income, derived from your work in a US company, you should pay attention to the limits and conditions established to determine whether you are obliged to file the Personal Income Tax (IRPF) return for the corresponding financial year.
Since the payer of the US pension does not withhold Spanish personal income tax, if the amount of the pension exceeds 14,000 euros per year, according to the limits and conditions applicable in the year, you would be obliged to file the personal income tax return for that year. It is important to bear in mind these specific limits and conditions for each tax year.
What is the agreement between Spain and the United States?
Under the Convention between Spain and the United States of America (CDI), taxation for tax residents in Spain of income most commonly obtained from U.S. sources would be as follows:
Pensions:
Pensions received due to dependent work performed for the U.S. government, political subdivision, or local entity would generally only be taxed in the U.S.
Pensions received due to previous private sector employment would generally only be subject to taxation in Spain.
Income from Real Property:
Income from real property located in the United States may be subject to taxation in both Spain and the U.S. The resident taxpayer would be entitled to claim the international double taxation deduction in Spain.
Dividends:
Dividends from U.S. sources may be subject to taxation in Spain according to its domestic legislation. If the beneficial owner is a resident of Spain, the tax in the U.S. cannot exceed 15% of the gross amount of the dividends. The resident taxpayer would be entitled to claim the international double taxation deduction in Spain up to that limit.
Interest:
Interest from U.S. sources generally may only be subject to taxation in Spain. However, in some cases, the tax in the U.S. cannot exceed 10% of the gross amount of the interest. In those cases, the taxpayer in Spain would be entitled to claim the international double taxation deduction up to that limit.
Director’s fees of U.S. resident company boards:
They may be subject to taxation in both the U.S. and Spain. The taxpayer would be entitled to claim the international double taxation deduction in Spain.
Capital Gains:
Gains from the sale of real property located in the U.S. may be subject to taxation in both Spain and the U.S. The taxpayer has the right to claim the international double taxation deduction in Spain.
Gains derived from the sale of shares, participations, or other rights may be subject to taxation in both Spain and the U.S. In Spain, the taxpayer would be entitled to claim the international double taxation deduction.
Gains from the sale of movable property attributable to a permanent establishment or fixed base in the U.S. may be subject to taxation in both the U.S. and Spain. In case of double taxation, the taxpayer in Spain would be entitled to claim the international double taxation deduction.
Gains derived from the sale of any other type of property generally may only be subject to taxation in Spain.
In addition to the above, the Convention also addresses other types of income, the treatment of which can be consulted in the text of the same.
What fiscal advantages does Andalusia have?
Andalusia is one of the most fiscally attractive autonomous communities for real estate investors.
Here are the fiscal improvements that are significantly contributing to attracting unprecedented levels of investment in Andalusia.
Reduction of the Property Transfer Tax and Documented Legal Acts Tax (ITP, AJD)
On April 27, 2021, the Autonomous Community of Andalusia approved a Decree-Law to reduce certain taxes and thus stimulate the economy.
What changes were made?
Property Transfer Tax (ITP):
Before: This tax was 8%, 9%, or 10%, depending on the case.
Now: It has been reduced to 7% for property purchases and the creation or transfer of certain property rights (except security rights).
Documented Legal Acts Tax (AJD):
Before: The general tax was 1.5% for notarial documents.
Now: It has been reduced to 1.2%.
How long will these reductions last?
These tax reductions, although initially temporary, will remain in effect for the years 2022, 2023, and 2024.
Elimination of the Wealth Tax in Andalusia
On September 20, 2022, the government of the Andalusian Regional Government decided to completely eliminate the Wealth Tax. This means that starting from 2023, the approximately 200000 Andalusian taxpayers will no longer have to pay this tax.
With this measure, Andalusia becomes the second region in Spain to eliminate this tax, after Madrid.
Previously, in Andalusia, individuals didn’t have to pay the Wealth Tax if their assets were worth less than 700,000 euros. This calculation included both movable assets (such as cars and jewelry) and immovable assets (such as houses), but it didn’t include the primary residence up to 300,000 euros.
The elimination of this tax has encouraged and will continue to encourage many families, both from Spain and abroad, to purchase homes and permanently settle in Andalusia, especially in the luxury housing sector.
Practical Elimination of the Inheritance and Gift Tax in Andalusia
Since April 11, 2019, in Andalusia, there is almost no Inheritance and Gift Tax for close relatives.
Inheritance
In the case of inheritance, spouses and direct relatives do not have to pay taxes if they inherit less than 1,000,000 euros. This includes:
Group I:
- Children or adopted children under 21 years old. This also includes children in permanent foster care or under guardianship for adoption.
Group II:
- Children or adopted children aged 21 or older. This also includes persons in permanent foster care or under guardianship for adoption.
- Spouses or registered domestic partners in the Andalusia Register of Domestic Partners.
- Parents, grandparents, and other ascendants.
- Adopters and persons providing permanent foster care or under guardianship for adoption.
Gifts
When receiving a gift, a 99% tax reduction is applied. This means that practically no taxes are paid for receiving gifts from close relatives.
If you are an American thinking of moving to Spain and you are not sure how to pay your taxes or how to buy a house in Spain, we can help you through the whole process.
Contact us through the following form and we will try to solve your doubts as soon as possible.
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