Return of the Dreaded Spanish Wealth Tax - A Brief Commentary

Many will remember that happy day in December 2008 when the Spanish Government eliminated Wealth Tax, or so it was thought!

The idea in 2008 was to make Spain a more attractive economy and do away with an archaic tax that has its roots in 1977 when inflation and interest rates were in double figures, the fledgling Spanish democratic state was crying for financial air and so an 'extraordinary tax' was born.

Many will remember that happy day in December 2008 when the Spanish Government eliminated Wealth Tax, or so it was thought...!

The idea in 2008 was to make Spain a more attractive economy and do away with an archaic tax that has its roots in 1977 when inflation and interest rates were in double figures, the fledgling Spanish democratic state was crying for financial air and so an 'extraordinary tax' was born

Tax planners thought it suspicious in 2008 that the tax was not eliminated from the statute book and, instead, the 100% exemption was introduced. We thought that the Government was reserving its position. Spain was running headlong into a long recession in 2008 so it all seemed very odd. And so it proved.

It seems that the Government has now given up entirely on the idea that making Spain attractive is worthwhile.

On 17 September 2011 the Government reintroduced Wealth Tax as an 'emergency measure' by simply changing the 100% exemption to a tax free allowance of 700.000 € for 2011 and 2012.

So, Wealth Tax is now back and with the following basic characteristics:

Who has to pay Spanish Wealth tax?
Individuals with net wealth that exceeds 700.000 €. It is a tax on individuals - not on families or couples or companies.
Who has to file a Spanish wealth tax declaration?
  1. Those with net wealth that exceeds 700.000 €, or those
  2. with gross assets that exceed 2.000.000 €, even if net assets are less than 700.000 €.
How is net wealth calculated, and at what tax rates?
Net wealth is calculated by deducting total liabilities from total assets. Assets are usually valued at cost but there are some exceptions to this rule. Spanish residents are taxed on worldwide net wealth.
Non-residents (typically owners of holiday homes) are taxed only on Spanish net wealth. Non-residents can only deduct from gross Spanish wealth those liabilities directly related to the Spanish assets (e.g. a mortgage).
Tax rate band € Cumulative wealth € Tax Rate % Tax on band € Cumulative tax €
167.129,45 167.129,45 0,2% 334,26 334,26
167.123,43 334.252,88 0,3% 501,37 835,63
334.246,87 668.499,75 0,5% 1.671,23 2.506,86
668.499,76 1.336.999,51 0,9% 6.016,50 8.523,36
1.336.999,50 2.673.999,01 1,3% 17.380,99 25.904,35
2.673.999,02 5.347.998,03 1,7% 45.457,98 71.362,33
5.347.998,03 10.695.996,06 2,1% 112.307,96 183.670,29
Thereafter d 2,5% d cd

Spanish residents are also exempt up to 300,000€ of the value of their homes.

Trading assets and shares in trading companies are also usually exempt if:

  1. Most of the assets are used in a trading activity and they provide the majority of an individual's income.
  2. For trading companies, if an individual owns 5%+ of the company, and
  3. Is a director receiving a salary that represents 50%+ of annual earnings (excluding investment income).

Warning! Non-residents who own property with Spanish companies are not exempt from Wealth Tax. Spanish company shares are just as much a Spanish asset as Spanish property! Spanish company ownership simply does not work, not just for wealth tax but also, more seriously, for Spanish Inheritance Tax mitigation. Many have made this mistake.

Annual income tax for residents/non-residents on theoretical rental income on second/holiday homes remains unchanged.

The 100% exemption should apply again for 2013 onwards. However, as we have seen, Governments change their minds. The elections this November are expected to result in a change of national Government from the socialist PSOE party to the centre-right Partido Popular, but it is unlikely that this tax will be eliminated before 2012, as the Partido Popular recently admitted. Sadly, it's hard to imagine how Spain will be able to eliminate this tax in the foreseeable future.

To make life more complicated, Wealth Tax has been ceded to the autonomous regions of Spain. They have extensive powers to modify the tax so we will have to see what happens in different parts of Spain.

Regardless of where they have property non-residents will have to follow the state system for this tax, and so the ridiculous situation could arise of neighbors paying completely different amounts of tax on identical properties just because they have different tax residence. If this is not a blatant case of discrimination, I don't know what is, and we will see whether the EU takes action if such inequalities appear in the future.

In the meantime, all is not lost, the tax planners are still in residence...