Spanish Taxes for US Expats. The Ultimate Guide
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This article provides a comprehensive guide for US expats living in Spain on how to navigate the complex world of American living in Spain taxes. From understanding the basics of the US tax system to filing taxes in Spain and the US, this article offers practical guidance and insights to help expats stay compliant and avoid costly mistakes. Whether you’re a seasoned expat or a first-timer, this guide has everything you need to know about US citizen living in Spain taxes.
Navigating the intricate landscape of US taxation Spain in a foreign land might seem daunting, but fear not! In this definitive FAQ guide, we’re here to illuminate the path ahead, addressing your most pressing questions about taxes in Spain for US expats. From understanding residency criteria and Dual citizenship USA Spain taxes to deciphering double taxation agreements, we’ve got you covered.
So, grab your virtual compass as we embark on a journey to demystify the Spanish tax system, ensuring that your expat experience is not only enriching but financially sound. Let’s dive in!!!
Expat taxes for Americans living in Spain involve navigating both Spanish and US tax systems. This entails understanding residency status, various tax types, reporting obligations, and potential tax treaties between the two countries.
As an American living in Spain, you’ll need to comply with the tax laws of both countries, which means that you’ll have to file a tax return with the Spanish government and with the IRS in the US.
The US has a citizenship-based taxation system, which means that as a US citizen, you are required to report your worldwide income and assets to the IRS, regardless of where you live.
Fortunately, there are multiple tax agreements and treaties established between Spain and the US that can help minimize the possibility of being taxed twice and make the process of reporting taxes more efficient for US expats.
In general when it comes to USA taxation Spain, you are considered a tax resident of Spain if you fulfill any of the following criteria:
- You stay in Spain for over 183 days in a calendar year
- Your business or economic interests are based in Spain
- or You are also considered a tax resident of Spain if your spouse and/or underage children are tax residents of Spain, unless you can provide evidence that you are a tax resident of another country.
In Spain, both residents and non-residents who earn income within the country are required to file taxes. Residents are taxed on their worldwide income, while non-residents are only taxed on income earned in Spain.
All residents of Spain are required to either submit an annual tax declaration or pay income tax (IRPF) to the Tax Administration Agency based on their income from the previous year.
Typically, you are required to file an annual tax return if you meet specific conditions such as having an annual income exceeding EUR 22,000, having income from multiple sources, being self-employed, earning more than EUR 1,600 in dividends, interest or capital gains per year, or earning more than EUR 1,000 in rental income in a single year.
For assistance with USA taxation Spain, please don’t hesitate to contact our experts.
In Spain, the entity responsible for tax-related matters is the Spanish Tax Administration Agency (Agencia Estatal de Administración Tributaria, AEAT), often recognized as Agencia Tributaria.
Its role encompasses the efficient enforcement of both the national tax and customs systems. Additionally, the agency assumes responsibility for managing resources from other Public Administrations and the European Union, as mandated by law or agreements.
Spain has several types of taxes that individuals and businesses may be subject to, such as:
Income Tax (Impuesto sobre la Renta de las Personas Físicas – IRPF)
Spain has a progressive income tax system, where the tax rate increases as the taxable income increases. The Spanish system for direct taxation of individuals is mainly comprised of two personal income taxes: Spanish personal income tax (PIT), for individuals who are resident in Spain for tax purposes, and Spanish non-residents’ income tax (NRIT), for individuals who are not resident in Spain for tax purposes but who obtain income in Spain.
Capital Gains Tax (Impuesto sobre las Ganancias de Capital)
In Spain, capital gains tax is levied on the profits made from selling property or other investments
In Spain, employees are taxed progressively. The average net tax rate for a single worker in 2021 was 21.1%.
The general CIT rate in Spain is 25%. Other tax rates may apply, depending on the type of company that is taxed and its type of business. Resident companies are taxed on their worldwide income.
Value Added Tax (VAT)
VAT or IVA in Spanish: Impuesto Sobre el Valor Añadido or Impuesto sobre el Valor Agregado) is an indirect and general consumption tax assessed on the value added to goods and services. It is borne ultimately by the final consumer and is charged as a percentage of the price. Every consumer in Spain must pay it.
Wealth tax in Spain is a progressive tax. The more value your assets have, the more you will pay. The different autonomous regions have various wealth taxes in place, and some don’t have any.
Inheritance tax in Spain applies to everyone, residents and non-residents alike. Also called succession tax (Impuesto de Sucesiones y Donaciones or ISD), this progressive tax becomes payable upon receipt of an inheritance from a friend or relative – whether this is property, money, or an asset of any kind.
Property taxes in Spain include the capital gains tax mentioned above as well as other property taxes called Impuesto sobre Bienes Inmuebles – IBI) and the Economic Activities Tax (Impuesto sobre Actividades Económicas – IAE). These taxes contribute to local services and infrastructure and are based on the cadastral value of their property.
Social security contributions are mandatory for anyone working in Spain. Foreign workers in Spain are also required to pay taxes into the Spanish social security program unless they have a coverage certificate from their home country showing they are still contributing to that system.
Other Taxes in Spain
In addition to these major types of taxes, there are also other types of taxes such as Excise Taxes, Environmental Taxes, Transfer Tax, Stamp Duty, Cryptocurrency Tax, Special Taxes such as the Tax on Certain Means of Transportation (Impuesto sobre Determinados Medios de Transporte) and the Tax on Insurance Premiums (Impuesto sobre Primas de Seguros), and Local Taxes such as the Economic Activities Tax (Impuesto sobre Actividades Económicas – IAE). These taxes are designed to target specific economic activities or transactions or contribute to local services and infrastructure.
We assist with US expats in Spain taxes. Please don’t hesitate to contact us.
The Spanish tax rates on employment income are not uniform across the country. The total tax liability is determined by adding the general tax rates of the state to the relevant regional tax rates. The tax rates for Spain in 2023 are as follows:
Up to €12,450: 19%
More than €300,000 47%
Meanwhile, Income tax on savings is imposed at the following rates :
19% for the first €6,000 of taxable savings income
21% for the following €6,000–€50,000
23% for the following €50,000–€200,000
27% for the following €200,000-€300,000
28% for any amounts over €300,000
For Non- Residents
For Non-resident in Spain, the general flat income tax rate is 24%. However, if you are a citizen of a country in the European Union or the European Economic Area, the rate is 19%.
Other income is subject to Spanish non-resident taxes at different rates as well. Capital gains resulting from transferred assets are taxed at a rate of 19%. Investment interest and dividends are taxed at 19%, although they are typically lower through double taxation agreements. Interest tax is exempt for EU citizens. Royalties are taxed at 24%. Pensions are taxed at progressive rates, from 8% to 40%.
Under Beckham’s Law
Beckham ‘s Law is a special tax system for foreigners who come to work in Spain through an employment contract with a Spanish company. Though they reside in Spain, they are considered non-tax resident. They only pay a 24% tax on their income of up to €600,000. Starting from 2021, there’s a higher tax rate of 47% for income that goes beyond €600,000. Additionally, employees assigned to work in Spain now have to pay a 3% tax on any income above €200,000 that comes from dividends, interest, or capital gains.
Spain’s capital gains tax
The tax rates on profits from selling property or other investments is as follows:
First €6,000: 19%
More than €200,000: 26%
If you bought a property before 1994, you may be liable to pay more tax than before as the taper tax on capital gains tax has been abolished. However, you might be eligible for an exemption if you are over age 65 and selling your main home or if you are under 65 and selling your main home to buy another main home in Spain.
Spain’s wealth tax is not a flat tax but instead based on the level of wealth. The tax rates range from 0.2% to 2.5%. If you have assets valued at more than €10 million, you can be taxed up to 3.5%. Everyone has a standard €700,000 tax-free allowance, and homeowners are allowed a further €300,000 against the value of their main residence.
For the years 2022 and 2023, a solidarity tax for ‘great fortunes’ (ISGF) has been introduced for residents who have assets and holdings greater than €3 million. The taxable rates are identical to wealth tax, but they apply everywhere in Spain rather than on a regional basis. This means that people who live in regions where wealth tax doesn’t exist will still have to pay the ISGF.
Spain imposes an inheritance tax, depending on the inheritance value:
Up to €7,993: 7.65%
€7,993 to €31,956: 7.65% to 10.2%
€31,956 to €79,881: 10.2% to 15.3%
€79,881 to €239,389: 15.3% to 21.25%
VAT or Impuesto sobre el Valor Añadido (IVA)
Spain has three levels of value-added tax (VAT): General (21%), Reducido (10%), and Superreducido (4%). The Reducido group includes passenger transport, toll roads, amateur sporting events, exhibitions, health products, non-basic foods, rubbish collection, pest control, and wastewater treatment. The Superreducido group includes essential foods, medicine, books, and newspapers. In 2021, the government increased IVA from 10% to 21% on alcoholic drinks and drinks containing added natural and derived sweeteners and/or sweetening additives. All IVA payers must submit all invoice data online within four days of the date of issuance, and no later than the 16th day of the month following the invoice date.
The general rate of corporate tax in Spain is 25%. Newly-formed companies are able to pay a rate of 15%. A reduction of 10% tax may be granted to profits locked into a special reserve for five years.
Companies must file tax returns within six months and 25 days after the end of the accounting period. Payment is by installments in April, October, and December, each installment usually being 18% of the tax liability.
Depending on the company’s type and business, different tax rates might apply. Resident companies are liable for taxation on both domestic and international income. For accurate and current information, consulting official sources or American tax Spain professionals is recommended.
The tax year in Spain is the same as in the US, running from January 1st to December 31st. Tax returns must be filed with the Agencia Tributaria between April 6th and June 30th of the year following the tax year.
There are no extensions available for filing tax returns in Spain. You have the option to pay all of your taxes when your tax return is due or to pay 60% at that time and complete the remaining 40% payment by the end of November.
Yes, Spain taxes the foreign income of its tax residents. If you are considered a tax resident of Spain, you are generally required to declare and pay taxes on your worldwide income, which includes income earned outside of Spain. However, there are certain provisions and exemptions that might apply based on tax treaties and specific conditions and up to EUR 60,100 of your income may be excluded from taxation. However, if you are not a Spanish tax resident, you are only required to pay taxes on income sourced from Spain.
Yes, the United States and Spain have a tax treaty that helps regulate the taxation of individuals and businesses operating between the two countries.
This treaty clarifies which government has the right to tax the earnings of expatriates, reducing the risk of double taxation.
The treaty includes updates to the current Spain-US Treaty, such as a 0% withholding rate on certain dividend payments, it also provides for reduced withholding taxes on interests, and royalties paid between the two countries.
While the treaty is not the final word on how items of income will be taxed, it does provide taxpayers with valuable insights into how either the US Government or Spain will tax certain sources of income and what the IRS reporting requirements are.
The treaty also provides a mechanism for resolving disputes between the two countries tax authorities and includes provisions to prevent tax evasion and fraud.
For Americans seeking assistance with US tax returns Spain, please contact HTJ.tax experts.
The United States and Spain have established a Totalization Agreement, also known as a Social Security Agreement.
This agreement aims to coordinate social security benefits between the two countries, prevent the dual taxation of social security contributions, and improve Social Security protection for individuals who have either worked or are currently working in both nations.
Through this agreement, individuals can qualify for benefits, avoid redundant contributions, and secure their entitled benefits. This arrangement safeguards their benefits from being compromised due to the division of their work history between the two countries. The agreement covers Social Security taxes, including the U.S. Medicare component, and encompasses Social Security retirement, disability, and survivors’ insurance benefits. This agreement also applies to those who are self-employed.
However, benefits under the U.S. Medicare program or the Supplemental Security Income (SSI) program are not included.
For those struggling with US taxes for expats in Spain, we suggest contacting US tax professionals.
Most Americans living in Spain are already exempt from double taxation due to the US tax Spain tax treaty. However, the IRS also provides several other potential tax credits and deductions for expats designed to ease the tax burden on expats while ensuring that they meet their U.S. tax obligations.
Foreign Earned Income Exclusion (FEIE)
The Foreign Earned Income Exclusion empowers expats residing in Spain, who meet specific requirements, to exclude a designated portion of their earned income from their U.S. federal taxable income. This exclusion significantly curtails the income subject to U.S. taxation. To qualify, you need to fulfill either the physical presence test or the bona fide residence test, which usually necessitate spending a certain duration living abroad.
Foreign Tax Credit (FTC)
With the Foreign Tax Credit, you can claim a credit on your U.S. taxes for the foreign taxes you pay in Spain. This credit serves as a safeguard against double taxation by offsetting your U.S. tax responsibility with the taxes you’ve already settled in another country. If your foreign tax liability surpasses your U.S. tax liability, you might even be able to carry over the excess credit to future tax years.
Foreign Housing Exclusion
Complementing the FEIE, the Foreign Housing Exclusion empowers you to omit a portion of your foreign housing expenses from your taxable income. This encompasses expenses like rent, utilities, and certain maintenance costs. The specific excluded amount varies depending on your location and other factors, tailored to accommodate the generally higher living expenses in foreign territories.
Child Tax Credit (CTC)
Expats residing in Spain with qualifying children might remain eligible for the Child Tax Credit. This credit aids in lowering your U.S. tax liability for each qualifying child below the age of 17. It’s vital to remember that eligibility criteria and credit values can evolve, underscoring the importance of staying updated on the latest developments.
There are several tax deductions available for expats living in Spain, such as:
While the Foreign Tax Credit was mentioned earlier, it’s important to emphasize the significance of accurately reporting and claiming foreign taxes paid to Spain. This can involve both income taxes and other types of taxes, such as property taxes.
If you’re engaged in business activities as an expat in Spain, you may have specific deductions related to your business expenses. This could include costs for operating your business, hiring employees, and maintaining a workspace.
Business Savings Accounts
Depending on your business structure and activities, there might be opportunities for deducting contributions to retirement accounts or other savings plans related to your business.
Expats who are on maternity leave while living in Spain might encounter specific tax implications. Depending on your situation, there could be deductions or credits related to this period of time.
While these deductions and credits are crafted to alleviate the tax load on expats and align with their U.S. tax commitments, the intricacies of tax laws, especially for expats, necessitate consultation with a seasoned tax professional adept in international taxation. Such guidance ensures a comprehensive grasp of available deductions and credits, aligning with your distinct circumstances.
Yes, US citizens living abroad, including expats in Spain, are generally required to file US taxes with the IRS, regardless of where they live.
The United States taxes its citizens on their worldwide income, which means that even if you’re living and earning income in another country, you still have a US tax obligation.
Typically, taxpayers must file Form 1040 by April 15th.
However, the IRS automatically extends expats’ due date to June 15th. This means that US expats living in Spain have until June 15th to file their US tax return.
Here are some of the most common tax forms that Americans living in Spain may need to file with both the US and Spanish authorities:
United States Tax Forms
IRS Form 1040: Individual Income Tax Return
US citizens must file this form to report their worldwide income, deductions, credits, and tax liability. Expats may be eligible for various tax credits and deductions to reduce their US tax liability.
FinCEN Form 114.Report of Foreign Bank and Financial Accounts (FBAR)
US citizens with foreign financial accounts exceeding $10,000 in value must file this form. It is filed electronically and is due by April 15th, with an automatic extension available until October.
IRS Form 8938: Statement of Specified Foreign Financial Assets (FATCA)
This form is used to disclose specified foreign financial assets if their total value exceeds certain thresholds. The thresholds vary based on factors such as filing status and location.
Spanish Tax Forms
If you are a tax resident in Spain, use this form to report worldwide income. This form is due on July 30th and does not have extensions available.
Used to report income sourced in Spain. Non-residents typically file and pay taxes quarterly within the first 20 days of January, April, July, and October.
For Non-residents who owns property in Spain, this form is used to report and pay a “deemed” income tax on the property. This form is due on December 31st of the year following the tax year in question.
For tax residents owning assets outside of Spain exceeding a combined total of EUR 50,000. Used to report those assets, this form is due on March 31st.
Navigating both US and Spanish tax systems can be complex. It’s highly recommended to work with US tax professionals who are knowledgeable in both countries’ tax laws to ensure accurate and compliant filings.
Renting out your US residence while living in Spain has tax implications in both countries.
In the US, you must report rental income to the IRS and may be able to deduct eligible expenses. Depreciation may also apply, and considerations such as the US-Spain tax treaty and joint ownership are relevant.
In Spain, it is essential to report rental income on your Spanish tax return, and allowable expenses such as repairs and mortgage interest can be deducted. Non-residents may be subject to a flat tax rate and quarterly tax obligations.
To address potential double taxation, you can utilize the US-Spain tax treaty and related relief mechanisms.
It is advisable to seek professional US tax in Spain expert advice in international taxation to navigate these complex tax issues.
The Foreign Bank Account Report (FBAR) is a crucial financial reporting requirement imposed by the United States government. It requires US citizens, residents, and entities to disclose their financial interests and signature authority over financial accounts held in foreign countries. The primary purpose of FBAR is to prevent tax evasion and other financial misconduct by ensuring transparency and accountability for offshore financial assets.
FBAR is managed by the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Department of the Treasury. The report is submitted annually through FinCEN Form 114, which is filed electronically. The reporting deadline is April 15th, with a potential extension until October 15th.
Here are some key points to understand about FBAR in Spain:
If you have a financial interest in or signature authority over foreign financial accounts, and the combined value of these accounts exceeded $10,000 at any point during the calendar year, you must file an FBAR. Financial accounts include bank accounts, brokerage accounts, mutual funds, trusts, and certain other types of accounts held outside the U.S
The FBAR must be filed electronically with FinCEN by April 15th (extended to October 15th upon request), following the calendar year in which the foreign accounts met the reporting threshold. Note that the FBAR deadline is separate from the U.S. income tax deadline.
Who Needs to File
US citizens, residents, and entities with foreign financial accounts that exceed a specific threshold during the calendar year must file an FBAR. This threshold is subject to change and depends on the filing status and location of the account holder.
Types of Accounts Covered
FBAR applies to a wide range of foreign financial accounts, including bank accounts, brokerage accounts, mutual funds, and certain types of insurance policies. Even accounts with only signature authority, such as those held by employees with control over foreign accounts, are subject to FBAR reporting.
The reporting threshold for individual taxpayers is usually determined by the aggregate value of their foreign financial accounts. If the aggregate value exceeds the threshold at any point during the year, FBAR reporting is required.
Penalties for Non-Compliance
Failure to file an FBAR or filing an inaccurate FBAR can lead to severe penalties. Civil penalties can range from non-willful violations with potential fines up to $10,000 per violation, to willful violations with penalties equal to the greater of $100,000 or 50% of the account’s highest balance.
Joint Ownership and Signature Authority
Even if an individual does not have financial ownership over an account but has signature authority, they may still be required to report it on an FBAR.
Foreign Account Tax Compliance Act (FATCA) and FBAR
While FBAR focuses on reporting financial accounts, the Foreign Account Tax Compliance Act (FATCA) primarily requires foreign financial institutions to report information about financial accounts held by US taxpayers directly to the IRS.
FBAR vs. Form 8938
It’s important to note that while FBAR deals specifically with foreign financial accounts, Form 8938 is another reporting requirement for certain taxpayers with specified foreign financial assets that exceed higher thresholds. Both FBAR and Form 8938 may need to be filed in certain cases.
FBAR is a critical component of the US government’s efforts to combat tax evasion and enhance transparency in international financial activities. Due to its complex nature and potential penalties for non-compliance, individuals and entities with foreign financial accounts should carefully assess their reporting obligations and seek professional guidance if necessary.
The Streamlined Procedure is a program offered by the Internal Revenue Service (IRS) to help US taxpayers catch up on their delinquent tax filing obligations, particularly those living abroad. It is designed to encourage non-compliant taxpayers to become compliant with their US tax obligations without facing severe penalties.
Here’s how you can get caught up on your US taxes using the Streamlined Procedure:
To qualify for the Streamlined Procedure, you generally need to meet two main eligibility criteria:
You must certify that your failure to file tax returns, report income, and pay taxes was not willful. In other words, your non-compliance should be due to negligence, oversight, misunderstanding, or other non-intentional reasons.
Residency: There are two variations of the Streamlined Procedure – one for US residents and another for non-residents. You should select the appropriate variation based on your residency status.
For US residents, you need to file the most recent three years of tax returns and the past six years of Foreign Bank and Financial Accounts (FBAR) reports, if applicable. For non-residents, you need to file the most recent three years of tax returns and the past three years of FBAR reports.
If you had previously filed tax returns but made errors or omissions, you need to file amended returns for those years. If you had not previously filed, you will be filing original returns.
As part of the US Streamlined Procedure, you may need to provide information about your foreign financial assets, including bank accounts, investments, and other holdings. This information helps the IRS assess your compliance.
Along with your tax returns and FBAR reports, you need to provide a signed certification statement indicating that you meet the non-willfulness requirement and that your failure to comply was not intentional.
Payment of Taxes
You are required to pay any taxes owed as indicated on your tax returns. However, under the IRS Streamlined Procedure, you won’t face the steep penalties that typically accompany late filings.
Submit all the required forms, returns, and statements to the appropriate IRS address. Make sure to follow the instructions provided by the IRS carefully.
Review and Processing
The IRS will review your submission. If everything is in order and you meet the criteria, they will process your case accordingly.
Inheritance tax in Spain applies to both residents and non-residents. It is commonly referred to as succession tax (impuesto de sucesiones y donaciones or ISD). This progressive tax is triggered when an individual receives an inheritance from a friend or relative, which can include property, money, or any other type of asset.
While national rules regarding inheritance tax are applicable throughout the country, it is important to note that Spanish inheritance tax rules can vary significantly by region. In some cases, the differences between regional regulations can be quite substantial.
Usufruct is a limited real right (or in rem right) that is commonly found in civil law and mixed jurisdictions. It combines two property interests known as usus and fructus: Usus (use) refers to the right to utilize or enjoy a possessed thing directly without altering it.
Fructus (fruit) refers to the right to derive profit from a possessed thing. This can include activities such as selling crops, leasing immovables or attached movables, collecting entry fees, and so on.
A usufruct is either granted in severalty or held in common ownership, as long as the property is not damaged or destroyed. The third civilian property interest is abusus (literally abuse), the right to alienate the thing possessed, either by consuming or destroying it (e.g., for-profit) or by transferring it to someone else (e.g., sale, exchange, gift). Someone enjoying all three rights has full ownership.
The legal concept of trusts does not exist in Spanish law; therefore, it is not recognized by the Spanish tax authorities or the Spanish courts. As a result, the tax treatment of trusts may vary on a case-by-case basis, and the Spanish tax authorities typically analyze the economic reality of the trust rather than its legal nature.
It is important to note that a trust should always take the form of a legal entity recognized by Spanish law. Since Spanish tax law does not specifically regulate the taxation of trusts, the tax treatment of the legal relationships involved in trusts should be determined abstractly based on the general guiding principles of the Spanish tax system. However, this task is further complicated by the scarcity of scientific and administrative doctrine on the subject, which lacks clearly defined criteria.
In practice, this means that the economic relationships between the members of a trust should be regarded as held directly between them, and the tax implications of this should be analyzed accordingly.
Spain doesn’t routinely allow nationals of another country to acquire Spanish citizenship if they intend to retain their original nationality. This means that if you want to become a Spanish citizen, you will usually be obliged to give up the citizenship of your country of origin.
Spanish succession law requires that a certain amount of the estate is left to children. This is often referred to as ‘forced heirship,’ and descendants must inherit two-thirds of their parent’s inheritance. The first third must be distributed equally among all children or other descendants.
In a simplified manner, taking into account the provisions of the agreement between Spain and the United States of America, the taxation for fiscal residents in Spain of the most commonly obtained US source income would be as follows: Pensions are considered as remunerations derived from previous employment and are treated differently based on whether they are public or private.
Public pension (Article 21.2 CDI): A public pension is received due to previous public employment, such as a pension received by a government official. Its treatment is as follows: In general, public pensions will only be taxed in the United States. In Spain, they would be exempt, although the exemption would be applied progressively. This means that if the taxpayer were obliged to file a return for obtaining other income, the exempt pension amount would be taken into account to calculate the tax applicable to the remaining income.
However, if the beneficiary of the public pension is a resident of Spain and also holds Spanish nationality, the aforementioned pensions would only be subject to tax in Spain.
It must be noted that LLCs and LPs are not generally eligible for the application of the benefits granted under most of the DTCs entered by Portugal. For instance, under Article 3, paragraph a) of the Protocol of the US/Portugal DTC, LLCs shall only be deemed residents in the US provided that income obtained by said corporate vehicles is effectively subject to tax in the US, either at the level of the corporation or at the hands of its partners.
This topic has already been brought to the attention of the Portuguese tax authorities, who have already issued several binding rulings stating that: Pursuant to domestic legislation, the allocation of income/profits by an LLC shall be deemed as a distribution of dividends, generally subject to 28% PIT in Portugal.
An LLC, being tax transparent, is not deemed resident in the US for the purpose of the DTC with Portugal. As such, income attributed to LLC’s partners shall not be deemed or treated as dividends for treaty purposes but rather shall be subject to the provisions of Article 24 of the DTC (“other income”), which attributes cumulative taxing rights to the source and residency contracting states.
The look-through approach adopted and the disregard of the LLC for the purpose of applying the DTC provisions does fit entirely with the NHR taxing principles, as the Portuguese tax authorities shall be looking at the nature of the income received by the individual taxpayer rather than the corporate vehicle.
Ultimately, even if the Portuguese tax authorities would deem the LLC/LP eligible for the DTC with the US, the LLC gains could be assimilated to dividends, which, pursuant to Article 10 of the treaty, are also taxable in the US, allowing thus to operate the exemption under the Portuguese legislation.
The British ISA (Individual Savings Account) is not a pension plan because it can be accessed in cases not provided for in pension plans. Therefore, its declaration may vary. The most similar product we have in Spain is the PIAS, whose benefits are also exempt, similar to ISAs.
The British QRPPS (Qualifying Recognized Overseas Pension Scheme) is a fund to which the rights of a pension plan can be transferred. It is designed for UK residents who move abroad. Therefore, it is still considered a pension plan. For the purpose of Form 720, it is not required to be declared. However, for IRPF (Personal Income Tax) purposes, it is considered regular income when redeemed.
The SIPP (Self-Invested Personal Pension) is a British pension plan itself and does not need to be declared in Form 720.
The Spain Residence by Investment Program requires that a foreign individual fulfills one of the following investments in the country:
- The acquisition of real estate with a minimum value of EUR 500,000 (one or several properties).
- Investment funds, bank deposits, or listed company shares in Spanish financial institutions with a minimum value of EUR 1 million.
- A government bond investment with a minimum value of EUR 2 million.
- Documentary evidence of the investment must be provided as part of the application process.
1. In summary, you would ordinarily still include the IRA distributions (from PRIVATE PENSIONS) as taxable income in Spain.
2. Given that they are Spanish income, you may be able to apply any excess foreign tax credits against taxes due to the IRS.
3. So, from a tax planning perspective, there may be an opportunity to:
- Offset taxes paid in Spain against what is due in the US.
- But keep in mind that there are generally two (2) different baskets of foreign tax credits, and they cannot be mixed.
- Foreign tax credits are only useful if you have foreign (non-US) income that is taxable in the US.
4. If a taxpayer only has US source income, there may be an opportunity to take a treaty position on Form 8833 to re-categorize US income as foreign income.
In Spain, Spanish law applies. However, for funds within an IRA, when there is a distribution, you are taxed in the USA. But in Spain, you will pay for the profits within the fund. In other words, you would need to bifurcate the contributions from the return on this capital invested. Furthermore, you would only need to match sales (assuming equity positions needed to be liquidated to facilitate withdrawals) and distributions within the present tax year so that only these gains are taxed at the appropriate tax rates in Spain, which range from 19% to 45%.
Is pre-immigration tax planning needed before moving to Spain?
Foreign individuals who become Spanish residents are subject to Spanish Personal Income Tax (PIT) on a worldwide basis. Non-residents will be subject to PIT, but only on income arising and capital gains obtained from Spanish sources. An individual may be taxed as part of a family unit, usually consisting of two spouses and children under the age of 18 (except those living independently with parental consent). The members of a family unit may choose to file separate tax returns. If one member of the family unit chooses to file a separate return, then the other members of the family unit must, in general, also file separately. Specific Personal Income Tax regulations, scales of rates, and special regimes for inbound assignees apply in the territories of the Basque Country (Vizcaya, Guipuzcoa, and Alava) and Navarra, and advice on the specific tax treatment applicable therein should be sought.
When it comes to rental income tax in Spain, there are different rules for tax residents and non-residents. The key differences are in the tax rates, rental property tax deductions, and the frequency of declaring your rental. But regardless of your residency status, if you earn rental income in Spain, you’ll need to make a tax declaration.
Rental income tax in Spain for Non-Residents: For non-residents, the tax you’ll pay is called the flat non-resident Income Tax (IRNR, Impuesto Sobre la Renta de personas No Residentes), and it’s a flat rate of 19% if you live in the EU or EAA countries. If you’re from outside these areas, the flat tax rate is 24%.
Rental income tax in Spain for Tax Residents: For tax residents, the tax on rental income is called the IRPF (Impuesto sobre la Renta de Personas Físicas). It’s a tax on the income you earn in a year, and it applies to all natural persons living in Spain, regardless of their nationality. This is a progressive and direct tax, with rates ranging from 19% to 47%, so the more you earn, the more you’ll pay. It’s worth noting that the property owner, not the renter, is responsible for paying the rental.
The wealth tax and Modelo 720 are filed annually. The 720 is just for informational purposes, but the huge penalties and the wealth tax might actually make you pay something. The 720 is designed to be a superset of the wealth tax. Therefore, if you file a 720 and later file wealth tax with smaller numbers, you will probably get a letter from the tax department.
Pension plans do not ordinarily have to be declared in the declaration of assets abroad. But what foreign products can be considered pension plans?
The problem arises because, colloquially, we refer to any financial product for old-age retirement as a pension plan. However, it is important to emphasize what requirements a pension product must have so that, according to Spanish regulations, it does not have to be declared in Form 720.
The regulations on pension plans are included in the revised text of the Law on the Regulation of Pension Plans and Funds, Royal Legislative Decree 1/2002. Article 1 explains the nature of pension plans.
Wealth Tax is levied on the worldwide net assets of Spanish tax residents and on goods and rights located, exercised, or complied with in Spain by Spanish non-residents. The tax is assessed based on the assets held by the taxpayer as of the assessment date, which is December 31.
Law 38/2022, established on December 27, introduces temporary energy taxes and taxes on credit institutions and financial credit establishments. It also creates a temporary solidarity tax on large fortunes and modifies certain tax regulations, thereby extending the individuals to whom Wealth Tax applies.
Beginning with the 2022 tax period, shareholdings will be subject to Wealth Tax if at least 50% of the company’s total assets consist, directly or indirectly, of Spanish real estate assets. For this purpose, the value of the real estate assets will not be based on the book value reported for accounting purposes by the company but rather on the value specified in specific Wealth Tax rules for real estate assets. This value will be the higher of the acquisition value, the cadastral value, and any other value assessed by the tax authorities for tax purposes.
Please note that the US and Spanish governments share taxpayer info, while Spanish banks pass on US account holders’ account info to the IRS, so it’s not worth hiding. The penalties for tax evasion for expats are severe, to say the least.
If you’re a US citizen, green card holder, or US/Spanish dual citizen, and you have been living in Spain but you didn’t know you had to file a US tax return, don’t worry: there’s a program called the IRS Streamlined Procedure that allows you to get up to date with your filing without facing any penalties. Don’t delay though, in case the IRS finds you first.
If a natural person, in accordance with what is described, turns out to be a TAX RESIDENT in Spain, it will be taxpayer for Personal Income Tax (IRPF) and must pay in Spain for the WORLDWIDE INCOME, that is, you must declare in Spain the income you obtain in any part of the world, without prejudice to the provisions of the Convention to avoid International double taxation signed between Spain and the country of origin of the income.
The treaties list certain types of income and provide, with respect to each of them, the Tax powers that correspond to each signatory State:
• in some cases, exclusive power for the taxpayer’s country of residence,
• in others, exclusive power for the country of origin of the income and,
• finally, in some cases, power shared between both countries, being able to both tax the same income but with the obligation for the country of residence of the taxpayer to arbitrate measures to avoid double taxation. The Hispanic American Double Taxation Agreement contains a “Reservation clause” according to which the United States reserves the right to tax on its citizens and residents as if the Convention were not in force. The tax borne in the United States by a resident of Spain based on the citizenship criterion does not give the right in Spain to apply a deduction for income tax international double taxation. If the United States taxes on income using of the “reserve clause” established for its citizens, double taxation it is up to the United States to avoid it.
The personal income tax period is the calendar year. A person will be a resident or a non-resident throughout the calendar year since the change of residence does not imply the interruption of the tax period.
The INCOME DECLARATION of individuals tax residents in Spain, is presented in the months of April, May and June of the year following the accrual. The regulations of personal income tax regulate limits and conditions that determine the obligation to present the tax declaration, which must be consulted every year. Exempt income is not into account to determine the obligation to declare.
Example: Taxpayer, tax resident in Spain, whose only income in 2015 is a pension from the United States, caused by having worked in a company in that country. (Spain generally has the exclusive power to tax as it is a private pension. Treatment in the Convention is explained below). If the pension exceeds the amount of 12,000 euros per year, taking into account the limits and conditions of the obligation to declare related to fiscal year 2015, would be obliged to present declaration by the personal income tax corresponding to 2015, since the pension payer American is not obliged to make withholdings on account of Spanish personal income tax.
In a simplified way, taking into account the provisions of the Agreement between Spain and the United States of America (CDI), the taxation for FISCAL RESIDENTS in Spain of the most commonly obtained US SOURCE income would be:
Pensions (see details in postscript below): understood as remunerations that have their cause in a job previously exercised, they have different treatment depending on whether they are public or private.
• Public pension (article 21.2 CDI): a public pension is understood to be one that is received by reason of a previous public employment; that is, the one received by reason for services rendered to a State, to one of its political subdivisions or to a local entity, for example, the pension received by an official. Its treatment is:
1. In general, public pensions will only be taxed in the United States.
In Spain they would be exempt, although exemption would be applied progressively. This means that if the taxpayer were obliged to file a return for obtaining other income, the amount of the exempt pension would be taken into account to calculate the tax applicable to the remaining income.
2. However, if the beneficiary of the public pension resident in Spain had
Spanish nationality, the aforementioned pensions would only pay tax in Spain.
• Private pension (article 20 CDI): private pension means any other type of pension received by reason of a previous private job, as opposed to that has been identified as public employment, for example, the pension received from the social security by a private sector worker. Its treatment is:
1. In general, private pensions will only be taxed in Spain.
2. However, payments made under the Social Security regime of United States, a resident of Spain or a citizen of the United States, may also be taxed in the United States, in which case the resident taxpayer would have the right to apply in Spain for personal income tax deduction for international double taxation, stating that the income has been subject to tax in the United States based on criteria other than that of citizenship.
Income derived from real estate (Article 6 CDI): income from real estate located in the United States, they can be taxed in both Spain and the United States. The resident taxpayer would have the right to apply the deduction for personal income tax in Spain international double taxation.
Dividends (article 10 CDI): US source dividends may be subject to taxation in Spain in accordance with its internal legislation. These dividends can also be taxed in the United States, if it is the country where the company resides that pays dividends and according to the legislation of that State, but if the beneficial owner of dividends is a resident of Spain, the tax thus required will have a maximum limit of 15 percent of the gross number of dividends. The resident taxpayer would be entitled to apply in Spain in the personal income tax the deduction for international double taxation up to that limit.
Interest (article 11 CDI): Interest from the United States may be subject to taxation in Spain in accordance with its internal legislation. However, these interests may also be taxed in the United States, in accordance with its laws internal, but if the beneficial owner of the interest is a resident of Spain, the tax thus required in the United States cannot exceed 10 percent of the gross amount of the interests. In Spain you would have the right to apply the deduction for international double taxation up to that limit.
Remuneration of members of the boards of directors of companies resident in United States (Article 18 CDI): can be taxed both in the United States and in Spain. The taxpayer would have the right in Spain to apply the double deduction international taxation.
Derivatives of real estate (article 13.1 CDI): the gains obtained by the alienation of real estate located in the United States, may be subject to taxation in both Spain and the United States. The taxpayer has the right to apply in Spain the deduction for international double taxation.
• Derivatives of shares, participations or other rights in one company or another legal person whose assets consist, directly or indirectly, mainly of real estate located in Spain, or derived from shares, participations or other rights in the capital of a company or other legal person resident of United States under certain conditions of period of stay and percentage of participation (article 13.2 and 13.4 CDI): the gains derived from the disposal of Those shares, participations or other rights may be taxed in Spain (article 13.2 CDI). However, with respect to those obtained from the sale of shares under certain conditions of period of permanence and percentage of participation (article 13.4 CDI), there may be shared taxation power to both countries. In the event of double taxation, in Spain the taxpayer would be entitled to apply the deduction for double taxation international. However, in the case of application of article 13.4 of the CDI, these earnings will be deemed to be earned in the United States to the extent necessary to avoid double taxation.
• Derived from movable property belonging to a permanent establishment or to a fixed base (article 13.3 CDI): the gains obtained from the disposal of assets that are attached to a permanent establishment or a fixed base from which a resident in Spain has or has arranged in the United States for the conducting business activities or providing professional services independent, including the gains derived from the disposal of the permanent establishment or fixed base, may be taxed both in United States as in Spain. In the event of double taxation, in Spain the taxpayer would have the right to apply the deduction for double taxation.
• Derived from another class of goods (article 13.7 CDI): in general, the gains derived from the sale of any other class of goods, excluding royalties, can only be taxed in Spain, provided that this is the State of residence of the transferor. An example of this type of capital gains would be the one corresponding to the sale of shares of a US company.
In addition to those mentioned above, the Agreement lists other types of income (business benefits, professional services, remuneration for salaried work, artists and athletes, public functions, other income …)
People residing in Spain must inform the Spanish Tax Administration about three different categories of assets and rights located abroad:
• accounts in financial institutions located abroad
• securities, rights, insurance and income deposited, managed or obtained abroad
• real estate and rights to real estate located abroad
This obligation must be fulfilled, through form 720, between January 1 and March 31 of the year following the one to which the information to be supplied refers.
There will be no obligation to report on each of the categories of goods when the value of the set of goods corresponding to each category does not exceed 50,000 euros. Once the informative return has been presented for one or more of the categories of goods and rights, the presentation of the declaration in subsequent years will be mandatory when the value has experienced an increase of more than 20,000 euros compared to that determined by the
presentation of the last declaration.
The Personal Income Tax Law and the General Tax Law establishes specific consequences for the case of non-compliance with this information obligation.
If you’re a citizen or permanent resident of the US, you must file a US tax return each year, no matter what country you happen to live in at the time. While the US taxes the international income of all citizens and permanent residents who live overseas, fortunately, it does provide several provisions to help protect you from double taxation on your US tax for expats. These include:
- The Foreign Earned Income Exclusion, which allows you to exclude up to $105,900 of foreign earned income from your 2019 US taxes and $107,600 from your 2020 US taxes,
- The Foreign Tax Credit, which allows you to offset the taxes you paid in your host country with your US expat taxes dollar for dollar, and
- The Foreign Housing Exclusion, which allows you to exclude certain household expenses that occur as a result of living abroad.
Note that in addition to your taxes in Spain for expats, you may also be required to file an informational return on your assets held in foreign financial accounts called a Foreign Bank Account Report (FBAR), otherwise known as FinCEN Form 114.
By planning ahead, you should be able to take advantage of the strategies above in order to minimize or eliminate your US tax obligation. To learn more about these tax savings and other tips, download a US expat tax guide.
There is a tax treaty in place between the US and Spain, which helps determine to which country different types of US tax for expats should be paid and at what point they should be paid. The purpose of the treaty is to ensure taxes are paid to the right country. Navigating the treaty on your own can be a bit complicated, so it’s a good idea to consult with an expat tax professional if you’re unsure of the requirements for your situation.
As a foreign employee in Spain, you’ll be required to pay into social security unless you have a certificate of coverage through your home country that states you’re still making contributions. If you’re a resident of Spain, your mandatory contributions are tax-deductible, but that is not the case if you’re a non-resident.
There is a US – Spain Totalization Agreement in place, which helps explain which country should be paid social security based on residency status, duration of time spent in the US or Spain and whether or not you were hired by a US or Spanish company at home or abroad.
Overall, the Spanish tax system isn’t drastically different than that of the US, which may make the process less overwhelming for you as a US expat. In any event, it’s always a good idea to consult with an expat tax professional to discuss your specific US tax for expats situation.
Seeking clarity on American taxes in Spain? Our professionals are here to help – reach out.