Most tax problems faced by expats in Spain do not arise from complicated investments or deliberate tax planning. They usually result from relatively simple misunderstandings about how the Spanish tax system works.
Here are nine of the most common tax pitfalls we encounter and how they can be avoided.
1. Using figures from the wrong tax year
The Spanish tax year runs from 1 January to 31 December. This differs from the UK tax year, which runs from 6 April to 5 April.
You cannot normally copy the figures shown on a UK P60 or tax return directly into a Spanish tax return. Instead, you need to calculate the income actually received during the Spanish calendar year.
This is particularly important for dividends, which may be paid irregularly and in different amounts throughout the year.
2. Declaring net income instead of gross income
Many people declare only the amount that reaches their bank account.
For example, for income derived from rentals, a letting agent may deduct its commission and other expenses before transferring the remaining rent to the landlord. However, the Spanish tax return should normally show the gross rental income, with any allowable expenses claimed separately.
The same applies to salaries. Employees will generally need to declare their gross salary before income tax and social security contributions have been deducted, rather than simply adding up the net payments received.
3. Assuming all foreign tax can be deducted in Spain
Tax paid abroad cannot always be deducted from the Spanish tax liability.
The relevant double taxation agreement determines which country has the right to tax each type of income. If tax has been deducted abroad when Spain had the primary right to tax that income, it may be necessary to request a refund from the other country rather than claim the tax as a credit in Spain.
This issue commonly arises with pensions, salaries, rental income and investment income.
4. Moving to Spain without reviewing your remote working arrangements
Many people assume that they can move to Spain and continue working for an overseas employer without changing anything.
However, employment income is generally connected to the country where the work is physically carried out. Someone working from their home in Spain may therefore become taxable in Spain, even if their employer and employment contract remain abroad.
This can create cash-flow problems if the overseas employer continues deducting foreign tax. The individual may need to pay tax in Spain and then request a refund from the foreign tax office.
Social security must also be considered. Depending on the circumstances, the employee may need to be covered by the Spanish system unless a valid exception, such as an A1 certificate, applies.
Remote working from Spain is certainly possible, but advice should be obtained before relocating rather than when the first Spanish tax return is due.
5. Confusing the M720 with Wealth Tax
The M720 and Wealth Tax are separate declarations with different purposes.
The M720 is an informative declaration relating to certain assets held outside Spain. It does not generate a tax payment simply because it is submitted.
Wealth Tax, on the other hand, is calculated by reference to a person’s net wealth and may include both Spanish and foreign assets.
It is therefore possible to have an obligation to submit Modelo 720 without having any Wealth Tax to pay. Higher Wealth Tax allowances in a particular region do not remove the separate Modelo 720 reporting obligation.
6. Ignoring local taxes because no bill was received
Owners of Spanish property should not assume that nothing is due simply because they have not received a bill.
Local taxes and charges such as IBI and basura can remain outstanding even where the town hall has made little effort to contact the owner. Surcharges and interest may then be added and the debt may eventually be passed to another public administration for collection.
Property owners should check that the relevant taxes are being paid each year and that their contact and direct debit details remain correct.
7. Failing to update your address with the tax office
It is extremely important that the Spanish tax office has the correct address for correspondence.
If the tax office sends a request for information or a tax assessment to an old address, the procedure does not necessarily stop simply because the taxpayer did not receive it. The matter may continue and ultimately result in additional tax, interest or penalties.
Non-residents should also ensure that reliable notification arrangements are in place, whether through their foreign address, a Spanish notification address or a fiscal representative.
Missing an important letter can be much more expensive than dealing with the original issue.
8. Treating the 3% property withholding as the final tax
When a non-resident sells a Spanish property, the purchaser will normally withhold 3% of the sale price.
This is not the final Capital Gains Tax liability. It is only an advance payment made on behalf of the seller.
The non-resident must still submit a tax return calculating the actual gain or loss. If the final liability is higher than the amount withheld, the difference must be paid. If it is lower, or the property was sold at a tax loss, the seller may claim a refund.
The return must generally be submitted within four months of the completion date.
9. Leaving Spain without obtaining tax advice
Tax planning is just as important when leaving Spain as it is when moving here.
A move abroad may affect tax residence, future Spanish filing obligations, investments, property and foreign asset reporting. Spanish tax residence is generally determined for the entire calendar year, so leaving Spain part-way through the year does not necessarily mean that Spanish residence ends immediately.
The timing of the move, the expected number of days spent in each country and the evidence of residence in the new country should therefore be reviewed in advance.
10. Assuming any bank account can be used to pay Spanish taxes
Having sufficient funds in a bank account does not necessarily mean that a Spanish tax payment will be processed correctly.
The payment options available depend on the particular tax return, the method of submission and the bank being used. Certain direct debits require an account that meets the Spanish tax office’s conditions, and not every bank operates as a collaborating entity for all types of tax payments.
Problems can also arise where a Spanish tax resident continues using an account registered by the bank as belonging to a non-resident, or where the account holder’s identification details do not match those held by the tax office.
A rejected payment may result in surcharges and interest even where the tax return was submitted on time and sufficient funds were available. It is therefore important to confirm the payment method and bank account details before the filing deadline.
How to avoid these pitfalls
The common mistake is assuming that foreign tax documents, bank statements or previous filing arrangements can be transferred directly into the Spanish system without adjustment.
Different tax years, gross and net figures, double taxation agreements and Spanish reporting requirements all need to be considered.
Obtaining advice before moving to Spain, working remotely, selling a property or leaving the country is usually much simpler and less expensive than correcting the position after the Spanish tax office has opened an enquiry.
This article is intended as general information only. The correct tax treatment will depend on each person’s individual circumstances.
