Tax Guide for US Expats Living and Working in Spain
Who Is Liable For Income Taxes in Spain
Individuals performing activities in Spain are subject to tax based on residence and source of income. Residents are taxed on worldwide income. Nonresidents are taxed on Spanish-source income and on capital gains realized in Spain only. Several tax exemptions may apply to expatriates.
Individuals are considered residents for tax purposes if they spend more than 183 days in a calendar year in Spain or if the center of their vital interests is located in Spain. A presumption of residence arises if an individual’s family lives in Spain. Residence is determined on a full-year basis; Spain recognizes no change of residence during a fiscal year. A Spanish national who gives up Spanish tax residence is nonetheless considered a Spanish tax resident for the next four years if the new tax residence is in a tax haven.
Special expatriate tax regime. On 10 June 2005, the Spanish government approved Regulation 687/2005, which modified the Spanish personal income tax regime for expatriates. Under the modified regime, an employee assigned to Spain who meets the criteria for being considered a Spanish tax resident may elect to be subject to tax under the nonresident taxpayer rules.
This election is subject to certain conditions, the most important of which are the following:
- The individual must not have been a Spanish tax resident in the last 10 years.
- The assignment in Spain must be based on a labor contract (Spanish local contract or letter of assignment).
- The employment must be physically performed in Spain and for the benefit of a Spanish company.
- The individual must apply for this special regime within six months of his or her arrival in Spain in accordance with the established election procedure. This six-month period cannot be extended.
- The expected employment compensation derived from the labor contract must not exceed
- €600,000 per year.
If the above election is made, the individual is subject to tax on employment income at a flat rate of 24%, instead of at the progressive resident tax rates of up to 49%, which depend on the autonomous community in which the taxpayer resides (other rates may apply to different types of income). The election is effective for the first year of residence and the following five consecutive years.
Income subject to tax. The taxation of various types of income is described below. For a table outlining the taxability of income items.
Employment income. Taxable employment income includes all compensation received for personal services, including salaries and wages, payments for certain business-related expenses, pensions, housing allowances and other allowances paid in cash or in kind.
Spanish residents with overseas duties may apply a foreign earned income exemption of up to €60,100 if certain conditions are met.
Irregular employment income (earned over a period that is longer than two years) may be eligible for a 40% reduction if certain conditions are met.
Self-employment and business income. Taxable self-employment and business income includes income from all industrial, commercial, professional and artistic activities carried on by a taxpayer.
Residents are subject to tax on self-employment and business income at the rates
Rates. Nonresidents are subject to a flat 24% tax on gross self-employment and business income after deducting certain expenses related to the business and the activity performed, such as salaries paid, materials purchased and miscellaneous expenses.
Directors’ fees. Directors’ fees are considered ordinary income and are taxable to residents at the rates and to nonresidents at a flat rate of 24%.
Investment income. Resident individuals are subject to tax on rental income and other consideration derived from the lease of rural or urban real estate at the rates. Non-resident individuals are subject to tax on such income at a flat rate of 24%. Net income from the rental of property may be reduced by 50% if the property is destined for living. This education may be increased to 100% if the tenant meets certain conditions.
For urban real estate used by the owner as a permanent residence, deemed income does not apply. However, for urban real estate used as a residence or not leased, the law presumes an income of 2% of the cadastral value (1.1% if the cadastral value of the real estate was increased after 1 January 1994). If the cadastral value is not determined, then presumed income is calculated by applying 1.1% to half of the value assessed in accordance with the principles of valuation for purposes of the net worth tax (see Section B).
Income from movable property includes dividends, interest, profits from copyrights and industrial property, and the return in cash or in kind on capitalization transactions and life insurance policies. Dividends are exempt up to a maximum of €1,500 per year.
In determining net income from personal property, limited administration expenses are deductible.
Spanish residents are subject to tax on dividends, interest and capital gains (regardless of the holding period) at the following rates:
- The first €6,000 at a rate of 19%
- Amount exceeding €6,000 at a rate of 21%
Tax nonresidents in Spain are subject to tax on dividends, interest and capital gains at a flat rate of 19%.
Income from public debt or nonresident bank accounts and income derived from the sale of shares or reimbursement of participations in investment funds in official Spanish markets are not taxable if Spain and the country of the taxpayer’s residence have entered into a double tax treaty that includes an exchange-of-information clause.
Interest income and capital gains derived from bonds and securities issued by resident entities or individuals are not taxable if the taxpayer is a resident of a member state of the European Union (EU).
If members of a family unit elect to file separate tax returns, the income derived from property must be attributed to the members who own the property. For spouses under the community property regime, 50% of the income must be attributed to each spouse (see Section H).
Taxation of employer-provided stock options. Employer-provided stock options are taxed at the time of exercise on the difference between the exercise price and the fair market value of the stock at the time of exercise. This income is also subject to social security contributions (see Section C).
Income derived from employer-provided stock options up to an annual limit of €12,000 may be exempt from tax for active employees if all of the following conditions are met:
- Offers of the stock options are made according to the general compensation policy of the company.
- The employee’s participation in the company does not exceed 5%.
- The employee holds the stock for at least three years before disposal.
If the stock option income is generated over a period exceeding two years and is not received on a periodic or recurrent basis, it may be possible to apply the 40% reduction for irregular employment income (see Employment income). However, the 40% reduction applies only to a limited amount of stock option income per year. For 2011, this amount is €22,100.
Any capital gains derived from the subsequent sale of the stock are subject to the capital gains tax rules described in Capital gains and losses.
Capital gains and losses. Capital gains are calculated as the difference between the transfer price of an asset and its acquisition price. Acquisition prices of real estate are indexed by applying coefficients determined by the government.
Capital gains derived by tax residents are taxed at a rate of 19% on the first €6,000 and at a rate of 21% on the amount exceeding €6,000. For tax nonresidents, the tax rate is 19%.
For Spanish tax residents only, capital losses incurred on sales of assets may be offset against capital gains. Any excess losses may be carried forward for four years.
For filers of individual returns, capital gains and losses must be imputed to the individual owner of the property. If the spouses are under the community property regime (see Section H), capital gains and losses are imputed 50% to each spouse.
Deductions and allowances
Deductible expenses. Social security contributions may be deducted in computing taxable employment income for tax residents.
In addition, the following reductions are allowed:
- A standard reduction of €4,080 if a taxpayer’s annual net employment income does not exceed €9,180
- A reduction of €4,080 less 35% of the net employment income exceeding €9,180 for net income between €9,180 and €13,260
- A reduction of €2,652 if net employment income exceeds €13,260
These amounts may be increased for disabled taxpayers and workers over 65 years of age, and in certain other cases.
Contributions to a regulated pension plan reduce the tax base. The annual deduction is limited to the lesser of €10,000 (€12,500 if the individual is more than 50 years old) or 30% of net employment income or business income (50% if the individual is more than 50 years old). In addition to the deduction described in the preceding sentence, individuals whose spouses receive net earned income and income from business activities of less than €8,000 may deduct contributions of up to €2,000 from their tax base. Excess deductions may be carried forward for five years.
Interest expenses that do not exceed gross income, expenses necessary to produce income and charges for depreciation are deductible from rental income.
Nonresidents are generally not entitled to deduct any expenses.
Personal allowances. The allowances listed below reduce an individual’s tax liability by an amount resulting from the application of the progressive tax rates to the total allowances. They do not reduce the tax base. The following are the allowances.
Credits. Tax credits are allowed in only a few specified circumstances, such as for gifts to specified entities and for certain double tax relief.
Relief for losses. Relief for losses may be available, subject to the limits and conditions established by law.
B. Estate and gift tax
An individual resident in Spain for fiscal purposes is taxed on assets and rights acquired by inheritance or gift, regardless of where the assets or rights are located. If the recipient is not resident in Spain, estate and gift tax applies only to assets located in Spain or to rights that may be executed in Spain.
Estate tax must be paid by the legal heir, and gift tax must be paid by the donee. The taxable amount for estate tax purposes is determined by deducting certain amounts based on the beneficiary’s age and on the relationship between the deceased and beneficiary. Tax payable is calculated by applying factors based on the taxpayer’s net worth, age, relationship with the deceased or beneficiary and type of asset.
Estate and gift tax rates vary depending on the autonomous region.
C. Social security
Contributions. Under Spanish domestic law, an individual must join the Spanish social insurance system if work and residence permits are received. The rate of social insurance contributions is 6.35% of salary for employees, and the rate for employer contributions is 30.15% of salary. For 2011, the maximum base for employee contributions is €38,761.26. For 2011, the maximum annual contribution is €2,461.34 for employees and €11,686.52 per employee for employers.
Totalization agreements. To provide relief from double social security taxes and to assure benefit coverage, Spain has entered into totalization agreements, which usually apply for a period of five or six years, with the following countries.
Andorra
Ecuador
Russian Federation
Argentina
Japan
Australia
Mexico
Tunisia
Brazil
Morocco
Ukraine
Canada
Paraguay
United States
Chile
Peru
Uruguay
Colombia
Philippines
Venezuela
Dominican Republic
Double tax relief and tax treaties
An individual resident in Spain may use foreign tax credits to avoid double taxation (imputation method). Spain’s double tax treaties apply both the imputation and the exemption-with-progression methods. Spain has entered into double tax treaties with the following countries.
Albania
Germany
Panama
Algeria
Greece
Philippines
Argentina
Hungary
Poland
Australia
Iceland
Portugal
Austria
India
Romania
Belgium
Indonesia
Russian Federation
Bolivia
Iran
Bosnia- Herzegovina
Ireland
Saudi Arabia
Israel
Serbia
Brazil
Italy
Slovak Republic
Bulgaria
Jamaica
Slovenia
Canada
Japan
South Africa
Chile
Kazakhstan
Sweden
China
Korea (South)
Switzerland
Colombia
Latvia
Thailand
Costa Rica
Lithuania
Trinidad
Croatia
Luxembourg
Tobago
Cuba
Macedonia
Tunisia
Cyprus
Malaysia
Turkey
Czech Malta
USSR* Republic
Mexico
United Arab Emirates
Ecuador
Moldova
Egypt
Morocco
United Kingdom
El Salvador
Netherlands
United States
Estonia
New Zealand
Uruguay
Finland
Norway
Venezuela
France
Pakistan
Vietnam
Georgia
* Spain honors the USSR treaty with respect to the former Soviet republics.
To learn more about the history, culture, economy and other information about Spain
We have been preparing US income tax returns for US Citizens and permanent residents living in Spain for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Spain and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Spain.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email