Spain Solidarity Wealth Tax 2023: All you need to know
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Introduction
If you’re an expat living in Spain or are perhaps interested in living in Spain, then you might have heard about the implementation of a new tax the Spanish government is levying on the wealthy.
The Spain Solidarity Wealth Tax, which will be temporary, is intended to raise taxes on taxpayers with greater financial resources in order to address the energy and inflationary crises and to harmonize wealth taxation across Spain’s autonomous regions.
According to the Socialist-led coalition government of Spain, almost 23,000 people will be subject to the new asset tax in 2023 and 2024 if their wealth surpasses 3 million euros or $2.9 million.
In this article, we will discuss the details of the new levy and how it can affect high net worth individuals. This should not be considered formal tax advice, and the information in the article may have changed since the time of publication.
Please seek professional tax experts or trusted financial planners for guidance on what you can do to minimize the impact of Spain’s Solidarity wealth tax on your finances.
What is Spain Solidarity Wealth Tax?
The Spain Solidarity Wealth Tax is one of several changes that will be made as part of Spain’s new budget aimed at helping those impacted by globally high inflation and skyrocketing energy costs.
The General State Budget Bill for 2023 already contains some of the tax increases that Spain’s Minister of Finance proposed in September of 2022.
The taxpayer’s net wealth, as determined by the wealth tax regulations, serves as the taxable base for the solidarity tax. A minimum exemption of €700,000 is available to taxpayers who are residents alone.
Similar to what is stated in the wealth tax law, there are exemptions that apply to net worth. For instance, this new tax now applies to exemptions like the principal property (up to €300,000) or the family company.
After determining that the taxable base exceeds €3 million, the following progressive tax rate will be applied (rounded numbers):
- 0% for the first €3 million in net worth
- 1.7% of net worth between €3 million and €5 million
- 2.1% of net worth between €5 million and € million
- 3.5% for an excess of €10 million in net worth
With the new tax, the government hopes to raise €1.5 billion.
Additionally, the administration intends to raise the income tax rate for those who make more than 200,000 euros ($191,870) from 26 to 27 percent.
For incomes over 300,000 euros ($287,805), the capital gains tax will increase by 2 percentage points to 28 percent.
All of these measures, which are anticipated to generate 3.1 billion euros ($3bn) over the next two years, were agreed upon by the Socialist party and its minor far-left coalition partner, Unidas Podemos (United We Can).
For those with lower incomes, according to the administration, the funds would be used to support programs for their welfare.
Government officials intend to lower the income tax on yearly salaries up to 21,000 euros ($20,146).
The Socialist Parliamentary Group of Spain and the Unidas Podemos party introduced the Spain Solidarity Wealth Tax in November 2022, through a number of joint amendments to the bill of law on new temporary taxes on banks and energy companies that is being processed in the Congress of Deputies.
To increase government revenues, the Spain Solidarity Wealth Tax requires higher contributions from taxpayers who have the greatest economic capacity to deal with inflation and the current energy crisis.
The plan is also set to harmonize taxation on personal wealth in the various autonomous communities within Spain with the introduction of a solidarity tax into the Spanish tax system.
How will this work alongside Spain’s established wealth taxation system?
Spain is one of the three remaining member countries in the Organisation for Economic Co-operation and Development that implement a net wealth taxation system.
The Autonomous Communities in Spain have the ability to set their own wealth taxes, therefore there is no single tax rate applicable to the entire country.
The new Spain Solidarity Wealth Tax is complementary to those already existing taxes. As opposed to being different in each region, it is a direct, individual tax that is intended to be levied across the entire country.
The solidarity tax is only assessed on taxpayers with a net worth over €3 million, which is why it is established as complementary, and this is the main distinction between the two taxes.
As is, the taxes an individual pays in the existing wealth taxes as calculated under the local autonomous community’s rules are deductible from what they need to pay for the Spain Solidarity Wealth Tax.
This deduction is made in order to prevent the imposition of both the wealth tax and the solidarity tax simultaneously. This effectively indicates that since no deduction will be produced, the solidarity tax will have a stronger impact in the autonomous communities where wealth tax is entirely exempt.
However, it should be noted that the existing wealth taxes are applicable to the “first euro” of taxable base, whilst the solidarity tax does not apply to wealth below €3 million.
It should also be noted that assets that are exempt from wealth tax are also exempt from the Spain Solidarity Wealth Tax, such as:
- Family-run companies
- Permanent residencies ($300,000 maximum)
- Vested privileges under some aid programs (pension plans, insured pension plans, corporate employee welfare plans, pan-European individual pension products, etc.)
- assets related to Spanish or regional history, as well as specific artwork and antiques
- household goods
- Securities with returns free from non-resident income tax are available to non-residents (e.g., fixed income securities for EU residents)
Once the Spain Solidarity Wealth Tax goes into effect, it will be a transitional measure that is applied for the first two tax years following its accrual.
Take note that there are also review provisions which were included in the legislation, will go into effect after this time period, allowing the government to assess the outcomes of the new tax and determine whether to keep it or repeal it.
Taxpayers who are also subject to the existing wealth taxes, such as residents who are taxed on their worldwide net worth and non-residents who are taxed on their net worth in Spain, are subject to the solidarity tax. Self-assessment tax returns must only be filed by non-residents if they are due.
In general, non-EU residents who pay taxes in Spain are required to designate a representative. This responsibility also applies to resident taxpayers who leave Spain before filing their self-assessment tax return and return only after the tax return period has ended.
If you have been working in Spain as an expat for some time, you would know that Spain has a number of distinct taxes on wealth, including a wealth tax, an inheritance and gift tax, a capital gains tax, a property tax, and a tax on property transfers.
The rates of property tax and property transfer tax are imposed locally. Depending on the amounts, capital gains tax rates might range from 19% to 26%. Meanwhile, regional governments impose wealth taxes, as well as gift and inheritance taxes.
A tax-free allowance of between EUR 700,000 and EUR 1 million is applicable, while wealth tax rates can reach 3.5% for wealth over EUR 10 million. The rates of inheritance and gift taxes range from 1% to 7%, and there are also various exemptions.
There is also a suggestion to change the law governing the wealth taxes that will have a likely effect on the Spain Solidarity Wealth Tax.
It is specifically intended to tax under wealth tax those arrangements where non-residents hold shares in foreign companies with Spanish real estate assets as underlying assets.
Even though many double taxation conventions charge indirect ownership of real estate, the Spanish wealth tax law as it is written now does not give non-resident taxpayers this option.
Since resident taxpayers are definitely subject to taxation on structures of this kind, this amendment aims to abolish the discrimination against them that currently exists.
Non-resident taxpayers will typically need to confirm that the applicable double taxation agreement they currently have also covers wealth taxes. In some circumstances, the related treaty may not apply to wealth taxes or any taxes of a similar nature (such as the solidarity tax).
In other situations, the treaty will specify which State has the right to tax a certain person’s wealth and will apply to wealth tax (as well as to comparable or similar taxes).
It is highly recommended you work with a tax expert or a trusted financial planner to fully understand the implications of the Spain Solidarity Wealth Tax on your finances.
Use a financial advisor who understands how these laws work and has experience helping people avoid them. A good advisor will also have access to resources and contacts within the industry who might be able to help you with any financial need.
Tax laws are complex and ever changing, so it’s important to stay informed about the laws that apply to you.
Why is Spain implementing the Solidarity Tax?
According to Spanish government, the revenues raised by the new tax will finance policies to support the welfare of Spain’s most vulnerable communities, particularly those affected by the current staggering inflation rates and energy prices.
They specifically predict that the 3.5% marginal rate of the solidarity tax will barely have an impact on 1.4% of wealth-tax payers. In contrast, 90% of wealth tax payers who do not have net worth above €3 million will be excluded from the solidarity tax.
The Spain Solidarity Wealth Tax is intended, among other things, to ensure that, at a minimum rate, large fortunes contribute to effectively and uniformly support public expenditure across the Spanish territory notwithstanding the wealth tax exemptions governed by the autonomous communities.
Given that the average annual pay in Spain is 21,000 euros ($20,146), the government expects this to primarily benefit around 50% of the workforce.
The implementation of the Spain Solidarity Wealth Tax followed continuing discussions in the European Union about its response to the economic consequences of the COVID-19 pandemic and the global events that succeeded it.
The establishment of the Next Generation EU program gave Member States much-needed financial assistance during the crisis, which was paid for by collective EU borrowing. This common debt’s source of repayment has not yet been chosen.
The resources intended to assist in financing the debt is still in its early stages to be proposed by the Commission before July 2023.
In case these proposals fail to set up new own resources, the financing of EU programs could become uncertain as the general budget would have to be used to repay the NGEU debt.
This is why some suggestions for additional resources were brought forward, including some based on different forms of wealth taxation. Ideas range from a coordinated introduction of surtaxes, to uniform wealth taxes implemented by national authorities or even a direct EU tax on wealth.
It is important to note the distinctions that the EU makes on solidarity tax and wealth tax.
A temporary tax imposed to meet a social need or address a shared problem is what is known as a solidarity levy. As a direct or indirect tax on various basis, it may be imposed as an additional cost on all taxpayers or a specific set of taxpayers.
A wealth tax is a tax levied against taxpayers, whether they are legal or natural persons, depending on the value of their assets.
A wealth tax may be imposed on all or a portion of a person’s personal assets, including money, bank deposits, real estate, priceless items, assets in pension and insurance plans, ownership of unincorporated firms, financial securities, personal trusts, etc.
The EU is currently still weighing the benefits and drawbacks of solidarity and wealth taxes to create new own resources as those for and against wealth taxation have numerous arguments supporting their views.
On the one hand, wealth taxes are only a small component of the overall tax structure and interact with many other types of taxation. A net wealth tax plus capital gains taxes could lead to an excessive total tax burden. In terms of addressing wealth buildup, a combination of capital income, inheritance, and gift taxes may be more effective and simpler to implement than a net wealth tax.
A net wealth tax then might be an effective remedy in the absence of these taxes. As a result, it is necessary to assess the entire tax system in light of social, economic, and policy goals. The fact that taxes are only one aspect of the state’s redistribution system’s revenue stream must also be taken into account if social and economic objectives are to be met.
On the other hand, the exact guidelines for wealth taxes can have a significant impact on the outcomes of the economy and society. Taxpayer decisions to relocate (themselves and/or their possessions) may be influenced by decisions made about the level of government taxation.
The family or the person may be the unit of taxation, and decisions about tax exemption and/or bracket levels, taxable assets, and exemptions may all have social and economic repercussions. Fairness, tax avoidance, and administrative costs are all impacted by the valuation norms and tax laws.
Of course, tax rates, tax ceilings overall, and anti-avoidance or evasion measures could have an impact on economic and social consequences as well as potential capital flight.
It remains to be seen what the EU will decide on the subject. It could very well be that the Spain Solidarity Wealth Tax would be a great case study to further such discussions and the results of this tax could shape how wealth taxes are handled across the region.
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