American Taxation Service in Spain for US Expats and Those Exposed to the US Tax System

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, 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.

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

Payroll Tax

In Spain, employees are taxed progressively. The average net tax rate for a single worker in 2021 was 21.1%.

Corporate Tax

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

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

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 Tax

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

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.

For Residents

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%
€12,451–€20,200: 24%
€20,201–€35,200: 30%
€35,201–€60,000: 37%
€60,001–€300,000: 45%
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%
€6,000–€50,000: 21%
€50,000–€200,000: 23%
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.

Wealth Tax

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.

Inheritance Tax

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.

Corporate Tax

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 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.

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.

Most Americans living in Spain are already exempt from double taxation due to the US-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.

These include:

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:

Foreign Taxes

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.

Business Activities

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.

Maternity Leave

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

Modelo 100

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.

Modelo 150

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.

Modelo 210

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.

Modelo 720

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:

Reporting Requirement

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

Filing Deadline

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.

Reporting Threshold

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:

Eligibility

To qualify for the Streamlined Procedure, you generally need to meet two main eligibility criteria:

Non-Willfulness

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.

Tax Returns

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.

Amendments

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.

Foreign Assets

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.

Certification Statements

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.

Submission

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.