17 March 2014

Commission of Experts present dossier to reform Spanish Tax System

On July 5th 2013 the government approved the creation of a Committee of Experts to approach the much needed reform of the Spanish Tax System as it stands today. The results would be made public in a specific dossier. This dossier was finally presented on March 14th and does indeed recommend a complete reform of the tax system that makes it simpler and offers more legal guarantees. In other words, taxes are to be easily understood, will help to avoid tax evasion, for which measures are put forth and, all this, without reducing the state’s revenue.

We wish to point out some of the major changes contemplated in the Reform and proposed by this Committee.

1- We consider very important that the Committee of Experts appear to be surprised that, despite the lower prices for property destined for holiday use and the recovering economies of neighboring European countries, our real estate market -its tourist and coastal areas- do not appear to be reactivated. The consensus was that this is due, probably, to the tax system that blunders the non-resident.

Many foreigners limit their stay in Spain in order to avoid becoming tax residents and therefore liable to pay Income Tax (IRPF), Wealth Tax (Impuesto sobre el Patrimonio –IP-) or Inheritance Tax ( Impuesto sobre Sucesiones –IS-) on income, assets and inheritance in Spain and any other country. This is clearly not an incentive for a potential investor to come to Spain, or for a pensioner to decide to establish his residence here. Especially when you consider that other countries, with important tourist industries like ours, have established specific tax regimes for regular non residents. The Committee considers that one of its priorities is to avoid having potential investors, top rank directors and CEO´s, as well as pensioners, search elsewhere to establish themselves under the protection of a more attractive tax regime.

In Spain there is a special tax system for non regular residents, applicable only to those who are in Spanish territory on a work permit or contract and, therefore, only considered for income generated as a result of a professional activity, with a maximum income of 600.000 euros per year. This system, for example would not be applicable to a foreign pensioner or a top management director with an income that surpasses this amount. So, today a foreign pensioner living in Spain, may have to pay a 40% or a 56% if he is a national of a country with no Double Imposition Treaty. To boost and regenerate this business and promote visits from this target market the Committee of Experts proposes, amongst others, the following changes:

  • Broaden the concept of “tax system for non regular foreign residents” to all those who move to Spain, not only to complete a work contract but also to those who, without a permanent establishment, develop economic activity as administrators or significant shareholders, pensioners and those who receive dividends from shares or property.
  • Eliminate the limit of 600.000 Euros income per year.
  • Eliminate property tax to those who are under this tax scheme (we must bear in mind that Income Tax and Non Resident Income Tax applies a financial income to property not used as a first residence).
  • Apply minimum tax rate for non-resident private pensions. With this the government is attempting to attract Northern European pensioners.
  • In the case of a non regular foreign resident inheriting property (not a regular non-resident), the same reduction enforced for Spanish nationals will be applied. The purpose of these measures is to prolong the stay of our foreign population in Spain therefore offering to become tax residents but eliminating the huge tax pressure currently on this population.

2.- NIE number: The procedure to obtain the NIE will be simplified and the obligation to visit the police authority will be eliminated.

3.- There is a specific proposal to eliminate Wealth Tax and endorse specific measures to avoid Regional Governments to establish their own in their respective geographic areas.

4.-Another proposal recommends the gradual elimination of Transmissions Tax and an immediate elimination of the tax on company operations as well as the charge on the incorporation of property guarantees, amongst these, mortgages.

5.- Regarding IVA (VAT), the committee proposes to charge a 10% only on property, transport and tourist services.

Marbella, on this 17th of March 2014

Written by

Ignacio

Pérez de Vargas López

[email protected]

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