What do expats need to know before relocating to spain?

In this article, GSB | B Corp? Partner Mauro De Santis Bo, Chartered MCSI LLB teams up with Partner Xavier Seguí Solanes from NAX Law to discuss the financial and tax implications of moving to Spain.

Spain is one of the most attractive countries in the world for expats – especially retirees who leave behind their home country for the sun, sea and a great lifestyle. In this article, Xavier and Mauro discuss:

• The Spanish Tax System – The Basics
• Spain’s Tax Charm – The Impatriate Regime
• Tax Optimisation Steps Before Relocating to Spain
• Financial Matters Expats Need to Know Before Moving to Spain
• Offshore Investments and Spanish Taxation
• Benefits of Life Assurance Policies in Spain

The Spanish Tax System and Financial Strategies for Expats

The Spanish Tax System – The Basics

In Spain, the primary direct taxes on individuals are personal income tax (PIT), gift and inheritance tax (GIHT), wealth tax (WT), and the tax on large fortunes (TLF). WT and TLF are unique to Spain, and readers may be unfamiliar with them. However, several lawful ways exist to significantly reduce these taxes. While WT and TLF are distinct, they are practically considered as one because the WT paid is deductible from the TLF.

A key concept in the Spanish tax system is tax residency. Tax residents in Spain are subject to these taxes on a worldwide basis, meaning income and assets from anywhere in the world are taxable. Conversely, tax non-residents are only taxed on income arising from Spanish sources or assets located in Spain.

Another critical point is that Spain’s tax system is not harmonised. The country comprises 17 autonomous regions and 2 autonomous cities, each with wide legislative powers on tax. Therefore, the choice of the region of residence can significantly impact one’s tax obligations.

Spain’s Tax Charm – The Impatriate Regime

Spain’s greatest tax incentive for individuals is the impatriate regime, introduced in 2003, famously known as the “Beckham Law” when Sir David Beckham joined Real Madrid. This regime aims to attract dynamic individuals to Spain.

The requirements to qualify as an impatriate are straightforward but need careful analysis:

• The person must not have been a tax resident in Spain in the previous five years.
• The person relocates to Spain due to an employment contract, appointment as a director, starting an innovative economic activity, or providing services to an innovative company.
• The person does not conduct economic activities through a permanent establishment in Spain except for innovative activities.

The impatriate regime is not automatic; eligible individuals must opt in within a set deadline via an electronic form submitted to the Spanish tax authorities. Unlike some European regimes, the impatriate regime is free of charge.

The tax benefits of the impatriate regime include:

• Impatriates are only subject to PIT on Spanish-sourced income, except for employment income and income from innovative activities.
• A favourable PIT rate of 24% for the first EUR 600,000 of taxable income and 47% for any income exceeding EUR 600,000, compared to rates up to 54% for ordinary residents.
• Impatriates are subject to WT only on assets and rights located in Spain.

Following the introduction of TLF in 2022, the Spanish tax authorities confirmed that impatriates are only subject to TLF on assets located in Spain. The impatriate regime benefits families as well, with spouses and children under 25 years also eligible under certain conditions.

The impatriate regime lasts six years, after which individuals become subject to the general tax regime if they continue to reside in Spain. Notably, years spent in Spain under the impatriate regime do not count towards the 10-year residence requirement for exit tax.

Tax Optimisation Steps Before Relocating to Spain

Before relocating, the best tax optimisation step is to ensure eligibility for the impatriate regime. This involves reviewing tax residence history, reasons for relocation, and planned activities in Spain. Mistakes can occur, and the Spanish tax authorities may challenge cases.

It’s essential to structure income and wealth appropriately before moving to maximise tax benefits. Achieving impatriate status while generating income and holding assets outside of Spain is ideal. Instruments such as a life insurance wrapper can be beneficial.

Financial Matters Expats Need to Know Before Moving to Spain

Spain is a top destination for expats, particularly retirees seeking sun, sea, and a great lifestyle. Understanding the tax implications of holding offshore investments is crucial. Spanish tax residents are taxed on worldwide income, including offshore investments.

Offshore Investments and Spanish Taxation

Expats must be aware of the tax rates applied to income from offshore investments, including dividends, interest, and capital gains. The tax rates for savings income are progressive:

• €0 – €6,000: 19%
• €6,001 – €50,000: 21%
• €50,001 – €200,000: 23%
• €200,001 – €300,000: 27%
• €300,001 and above: 28%

Utilising Spanish tax-compliant investment vehicles can improve tax efficiency. One effective option is the Spanish Collective Investment Bond, a type of life assurance policy offering numerous advantages for those relocating to Spain.

Benefits of Life Assurance Policies in Spain

• Optimal Wealth Transmission Planning: Life insurance policies can act like trusts without legal uncertainties, ensuring assets transfer on a specific date and payments are made directly to beneficiaries.
• Tax Efficiency: Gains on investments within a policy are deferred until withdrawal, offering significant advantages over direct investments. Payments to beneficiaries are not subject to Spanish personal income tax, and lifetime gifts can benefit from low gift tax rates.
• Exemption from Exit Tax: Compliant policies fall outside the scope of exit tax, ideal for internationally mobile individuals.

Growth within a Spanish tax-compliant policy is not taxed until funds are withdrawn, providing substantial tax deferral benefits. For example, a $1,000,000 investment with 5% growth yields $50,000 annually, but no tax is due if no withdrawals are made.

Conclusion

Relocating to Spain offers exciting opportunities but requires careful financial and tax planning. Understanding the tax implications of investments, employing tax-efficient strategies, and working with licensed professionals ensures a successful transition. Partnering with a tax adviser and a financial planner provides comprehensive support, helping expats navigate complexities and make the most of their move to Spain.

Get in touch

Contact GSB?today if you would like to discuss any of these matters with our in-house team.

Disclaimer

THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH.

THE TAX TREATMENT IS DEPENDENT ON INDIVIDUAL CIRCUMSTANCES AND MAY BE SUBJECT TO CHANGE IN FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

THE INFORMATION ON THIS PAGE IS DIRECTED ONLY AT PERSONS OUTSIDE THE UNITED KINGDOM AND MUST NOT BE ACTED UPON BY PERSONS IN THE UNITED KINGDOM.