Spain

Employment income

For the purposes of PIT, all remunerations, regardless of their name or nature, whether they are in cash or in kind, generated directly or indirectly from personal work or from an employment or statutory relationship, and which are not business earnings, are employment income.

Amongst others, the following income is regarded as gross employment income:

• Salaries or wages.
• Living allowances.
• Housing allowances.
• Bonuses.
• Tax reimbursements
• Remunerations in kind (e.g. schooling and rent-free housing).
• Pension income.
• Amounts paid to deputies, senators, councillors and the like for the performance of their work.
• Remunerations of directors and members of boards of directors.
• Income from literary, artistic, or scientific works when the trading rights for such works have been transferred.
• Income generated from providing courses, conferences, seminars, etc.
• Income from involvement in humanitarian or welfare activities organised by non-profit organisations.
• Alimony received from an ex-spouse and non-exempt annuities for food.
• Non-exempt grants.

PIT is levied on severance pays awarded for dismissals over the limit established in Spanish employment law. The part of the awarded severance pay under the limit that exceeds EUR 180,000 is also subject to and not exempt from PIT.

Employment income is included in the PIT general base and taxed at progressive tax rates, which vary depending on the autonomous community where the taxpayer is situated (see the Taxes on personal income section for further information).

Withholdings and advance tax payments are payable on salaries and wages and on benefits.

Non-residents obtaining employment income in Spain are taxed at the general NRIT rate of 24%. For residents of other EU member states or EEA countries with which there is an effective exchange of tax information, the rate is 19%. Pensions are taxed at special rates.

Equity compensation

Shares granted to employees are generally regarded as employment income and, at granting, are considered to be remuneration in kind at their market value.

However, under PIT regulations, company or group shares awarded to employees free of charge or for a price that is lower than market price are not remunerations in kind, up to the limit of EUR 12,000, provided that the terms and conditions of the offer are the same for all employees.

In addition, with effect from 1 January 2023, the recently approved Law to promote the Spanish ecosystem for emerging companies (’Start-up Law’; Law 28/2022) has introduced a favourable tax treatment for the award of shares or stock options to start-up employees (according to the definitions established in the Law 28/2022). The referred preferential tax treatment consists of the following:

• Tax exemption increase: An increase in the above-mentioned tax exemption up to a maximum annual gross amount of EUR 50,000 per employee for start-up employees. Only with respect to the award of shares or stock options to start-up employees, it will now not be required to award such shares to all company employees under the same terms with respect to the application of this tax exemption, but it will be sufficient that the shares are awarded as part of the employer’s general remuneration policy.

• Deferred taxation: Any non-tax-exempt income derived from the award of shares or stock options to start-up employees will be subject to taxation when the first of the following events takes place in the future:
  • The awarded shares are listed on a regulated stock exchange in Spain or abroad.
  • The shares are disposed of by the taxpayer.
  • A ten-year period has passed since the award.

• Special valuation rule: This special valuation rule on the award of shares to start-up employees involves that, in case that independent third parties have subscribed a share capital increase in the preceding year, the delivered shares to the start-up employees will be valued at the same value at which such independent third parties would have subscribed for the same start-up shares. However, in case that an independent third party has not subscribed a share capital increase in the preceding year, the value of the delivered shares will be the fair market value (general valuation rule).

Carried interest

With effect from 1 January 2023, the Spanish law on the promotion of the emerging company ecosystem (‘Start-up Law‘; Law 28/2022) introduced into Spanish PIT for the first time the figure of carried interest, providing for its taxation according to the Spanish PIT Law.

The aim of this new regulation is to predict the taxation in Spain of the income obtained from the successful management of private equity (alternative investment funds defined in the EU Directive 2011/61/EU included in any of the following categories: (i) private equity defined in article 3 from the Law 22/2014, (ii) European private equity funds, (iii) European social entrepreneurship long- term funds, and (iv) any equivalent investment vehicle.

The tax treatment of such carried interest income consists of the following:

• The resulting income will be considered employment income under the Spanish PIT Law.
• 50% of the carried interest income will be taxed (without applying any tax exemption or tax reduction) when the following requirements are met:
  • The economic rights must be contingent on the rest of the investors obtaining a minimum profit to be defined in the entity’s articles of association.
  • The entity’s shares or economic rights must be maintained for a minimum period of five years unless there is an inheritance transfer (mortis causa), there is an early liquidation, or they are cancelled due to a change in the managing entity.
  • This tax treatment will not have an effect when the special economic rights derive directly or indirectly from an entity that is a tax resident of a non-cooperative jurisdiction or a jurisdiction with which there is no regulation on mutual assistance regarding the exchange of tax information.

Business income

For the purpose of PIT, business income is income generated by a person from a combination of personal work and capital, or only one of these factors, for the production or distribution of goods or services as a result of the person’s own organisation of the means of production and/or human resources of the business.

Specifically, income generated from extraction, manufacturing, trade or service activities, including income obtained from handicraft activities, agriculture, forestry, livestock farming, fishing, building, mining and the practice of liberal, artistic, or sporting professions is considered business income.

Leases of properties are only considered a business activity when at least one person is employed on a full-time basis to organise the lease activity.

Net business income is calculated in accordance with Spanish CIT laws with the application of some specific regulations.

Business income is included in PIT general income and is taxed at the progressive tax rates applicable for each autonomous community (see the Taxes on personal income section for further information).

Self-employed persons who are tax resident in Spain and who carry on an economic or business activity are required to make advance payments of PIT during the year (in April, July, October, and January). The tax base and percentage of these advance payments will depend on the evaluation method applicable.

• If the person applies the direct evaluation method (normal or simplified), the tax base is determined in accordance with CIT regulations with certain specific differences, and the percentage of the advance payment is 20%.
• If the taxpayer applies the objective evaluation method, the tax base for the advance payment is determined in accordance with income indicators established by Spanish law (signs, indexes, and modules). In this case, the percentage of the advance payment is generally 4%.

Business income obtained in Spain by Spanish non-tax residents acting without a PE is taxed at the general NRIT rate of 24%. For residents of other EU member states or EEA countries with which there is an effective exchange of tax information, the rate is 19% .

Capital gains

Capital gains and losses are variations in the value of a person’s wealth due to an alteration in its composition that are not considered to be income under Spanish PIT law.

It is important to note that capital gains can arise on all inter vivos transfers, but not on mortis causa transfers.

When the capital gain or loss is generated from the transfer of an asset, it is calculated by deducting the previous acquisition value from its transfer value; otherwise, the capital gain or loss is the market value of the asset.

Capital gains arising from transfers of assets are included in savings income and are taxed at the corresponding progressive tax rates of between 19% and 28%.

A transitory tax regime may be applied for transfers of assets or rights that are not used to carry on a business activity and were initially acquired before 31 December 1994. In accordance with this regime, reduction coefficients (14.28%, 25%, or 11.11% per year, depending on the type of assets, for each year that the assets or rights have been held between the acquisition date and 31 December 1996) may be applied on the proportional part of the capital gain generated from the date of acquisition up to 19 January 2006. Therefore, if the transitory regime is applicable, the total capital gain should be divided into two parts:

• The part of the capital gain generated from the acquisition date up to 19 January 2006, on which the reduction coefficients is applied.
• The part of the capital gain generated from 20 January 2006 up to the date of the transfer. This part is taxed at a progressive tax rate of between 19% and 28% and no reduction coefficients apply.

With effect from 1 January 2015, this transitory tax regime is applied when the value of the transfer does not reach EUR 400,000 per taxpayer. For this purpose, the transfer values of all assets transferred from 1 January 2015 on which this transitory regime may be applied should be added together, and if the total amount exceeds the threshold, the transitory regime is applied proportionally to the part of the transfer value that does not exceed the threshold.

The capital gain generated from the sale of a person’s home is tax exempt for the same proportion as the amount that is reinvested in a new home, provided that the new home is purchased within two years.

Capital gains not generated from transfers of assets (such as some lottery prizes) are included in the general tax base and are taxed at progressive tax rates, which are different for each autonomous community (see the Taxes on personal income section for further information).

Capital gains obtained in Spain by non-residents without a PE are taxed at a rate of 19% when they are generated from transfers of assets otherwise they are taxed at the general NRIT rate of 24% (for residents of other EU member states or EEA countries with which there is an effective exchange of tax information, the rate is 19%).

The transitory tax regime for transfers of assets and rights not used to carry on an economic/business activity and initially acquired before 31 December 1994 is also applicable for capital gains obtained in Spain by non-residents without a PE.

Capital gains arising from transfers of assets by PIT payers over the age of 65 are tax exempt if the total amount of income obtained from the transfer is used within six months to establish an assured life annuity for the taxpayer. A maximum of EUR 240,000 may be used to establish an assured life annuity. For partial reinvestments, only the part of the capital gain obtained that corresponds to the reinvested amount will be tax exempt.

For transfers of properties located in Spain by non-residents without a PE (individuals), the purchaser is required to deduct 3% of the price of the transfer and deposit it with the local tax authorities. This withholding is treated as an advance payment of capital gains tax for the seller. The non-resident seller must be formally represented in the transaction by a lawyer or legal representative.

Dividend income

Dividends and other income generated from holding interests in companies are included in PIT savings income and taxed at a 19% tax rate up to the first EUR 6,000 of income, a 21% tax rate for the following EUR 6,000 to EUR 50,000 of income, a 23% tax rate for the following EUR 50,000 to EUR 200,000, a 27% tax rate for the following EUR 200,000 to EUR 300,000, and a 28% tax rate on any remaining income.

Dividend income obtained by Spanish non-resident persons without a PE is taxed by Spanish withholding tax (WHT) at the flat rate of 19% (DTTs normally establish lower rates).

Interest income

Interest and other income generated from transferring a person’s own capital to third parties are included in PIT savings income and taxed at a 19% tax rate up to the first EUR 6,000 of income, a 21% tax rate for the following EUR 6,000 to EUR 50,000 of income, a 23% tax rate for the following EUR 50,000 to EUR 200,000, a 27% tax rate for the following EUR 200,000 to EUR 300,000, and a 28% tax rate on any remaining income.

As an exception, when capital transferred to a related company exceeds three times the latter company’s equity, the interest corresponding to the excess will be included in general taxable income and taxed at the progressive tax rates, which are different for each autonomous community (see the Taxes on personal income section for further information).

Interest income received by non-residents without a PE is taxed by Spanish WHT at a flat rate of 19%. An exemption is applicable for EU residents. DTTs normally establish lower rates.

Lease income

Income generated from leases of properties by taxpayers is included in PIT general taxable income and taxed at progressive tax rates which are different for each autonomous community (see the Taxes on personal income section for further information).

PIT is levied on any residential properties owned by taxpayers (excluding the taxpayer’s habitual residential property) that have not been leased out. An income allocation of 1.1% or 2% of the property’s rateable value is included in PIT general taxable income and taxed at progressive tax rates. A 24% tax on 1.1% or 2% of the property’s rateable value is also levied on non-resident taxpayers (individuals) without a PE with properties in Spain that are not leased out. For residents of other EU member states or EEA countries with which there is an effective exchange of tax information, the rate is 19%.

WHT is levied on rent payments received by non-residents from leases and sub-leases of properties in Spain at the flat rate of 24%. For residents of other EU member states or EEA countries with which there is an effective exchange of tax information, the WHT is 19%.

EU citizens may deduct all costs incurred for the maintenance of property from taxable income. Non-EU residents cannot deduct any costs.

Exempt income

The following incomes are specifically exempt from PIT (usually subject to certain limits on the amounts involved):

• Certain literary, artistic and scientific awards.
• Severance pay for dismissals, up to the limit established in Spanish employment law. The tax exemption is limited to EUR 180,000.
• Social security benefits or benefits from any other authorities replacing the social security authorities due to total permanent incapacity for work or sever invalidity.
• Child support received by a parent following a court judgement.
• Employment income earned for work carried out abroad if this income is subject to an identical or similar tax to Spanish PIT, subject to certain limits and conditions (see the Taxes on personal income section for further information).