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Spain: Government prepares sweeping tax reform

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Vicente Bootello


José Ignacio Ripoll

The foundations of the Spanish tax system are shaking, although with a view to further fiscal consolidation. As the first signs of economic recovery emerged, the Spanish government indicated, at various forums and throughout 2013, that it intended to conduct a comprehensive analysis and review of the Spanish tax system, aimed at making the economy more competitive and encouraging saving while at the same time raising the tax revenue necessary to restore the budget balance. To this end, the government asked a group of academic experts to draw up a report with various tax measures and changes that would help achieve these aims; this document was presented on March 14.

The report is not binding on the government, although many of the proposals will foreseeably be taken into account in the tax reform that the government hopes to launch later in the year and which aims to shift the tax burden from direct taxation and statutory charges to indirect and environmental taxation.

The following are some of the key measures contained in the report:

  • Personal income tax: with a view to simplifying the tax and encouraging saving, the aim is to reduce tax expenses and remove exemptions and some cases of non-subjection, while at the same time significantly cutting tax rates.

  • Non-resident income tax: with a view to attracting foreign investors and retirees, the aim is to make the present system for inbound expatriates (known as the Beckham law), which allows people who transfer their tax residence to Spain to pay tax as non-residents at a fixed rate of 24.75%, more flexible. In this respect, the report proposes removing the ceiling on annual income (€600,000 ($828,000)), eliminating the limit on the amount of income that may be earned abroad (salary income obtained abroad cannot be more than 15% of total income), amending the requirement that the taxpayers have not been resident in Spain in previous years (in the last five years, in comparison with the last 10 years at present), and extending the period during which they may qualify for the regime (from the present five to 10 years).

  • Corporate income tax: given that Spain currently has one of the highest corporate tax rates in Europe (30%), and that rates are generally trending down, the report proposes gradually cutting the corporate rate to 20%. Nevertheless, it also proposes reducing/removing certain tax credits such as those for R&D&I, re-reviewing deductible finance costs, amending domestic and international double taxation avoidance mechanisms, and restating and reviewing asset amortisation/depreciation coefficients. The aim being for nominal tax rates to move closer to actual rates, to encourage investment decisions and restrict business strategies based purely on tax grounds.

  • VAT: subject to the logical restrictions imposed by the corresponding Directives, the aim is to remove/curb some exemptions and limit the number of cases where reduced rates apply.

We note that the proposals contained in the report would generally make Spain more attractive to foreign investors and should be positive for entities with acceptable debt levels, although the report also contains other proposals that we trust will be reviewed and amended when the government presents its proposed tax reform.

Vicente Bootello (vicente.bootello@garrigues.com) and José Ignacio Ripoll (jose.ignacio.ripoll@garrigues.com)

Garrigues Taxand

Tel: +345 145 200

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