2Central government taxes

2.2 Personal income tax

This tax, which is one of the pillars of Spain’s tax system, is currently governed by Law 35/2006, of November 28, on Personal Income Tax, which has been amended by Law 26/2014, of November 27, 2014, and by Royal Decree 439/2007, of March 30, 2007, approving the Personal Income Tax Regulations.

As discussed below, the taxation of nonresident individuals is regulated in a separate law (the Revised Nonresident Income Tax Law), which is analyzed in section 2.3.

2.2.1 Persons subject to the tax

The following persons are subject to personal income tax (PIT):

• Individuals habitually resident in Spanish territory.
• Individuals of Spanish nationality who are habitually resident abroad but fulfill any of the conditions laid down in the law (e.g. diplomatic and consular services, etc.).
• Moreover, any Spanish national who establishes his residence for tax purposes in a tax haven will remain subject to PIT (for the year in which residence is changed and for the following four years).

A taxpayer is deemed to be habitually resident in Spanish territory if any one of the following conditions is met:

• The taxpayer is physically present in Spanish territory for more than 183 days in the calendar year.

  Sporadic absences are included in determining the length of time a taxpayer is present in Spanish territory, unless tax residence in another country is proved. In the case of territories designated in the regulations as tax havens, the authorities may require the taxpayer to prove that he was present in such territories for 183 days in the calendar year.

  To determine the period spent in Spain, absences due to cultural or humanitarian cooperation, for no consideration, with the Spanish authorities are excluded.

• The main center or base of the taxpayer’s activities or economic interests is in Spain, either directly or indirectly.

In the absence of proof to the contrary, an individual is presumed to be resident in Spain if his/her spouse/husband (from whom he/she is not legally separated) and dependent under-age children are habitually resident in Spain.

Individuals who are payers of nonresident income tax and are resident in a Member State of the EU may elect to be taxed under Spanish PIT if they demonstrate that their habitual domicile or residence is in another EU Member State and that at least 75% of their total income during the year was obtained as salary income or business income in Spain.

For fiscal years starting on or after January 1, 2016, civil law partnerships not subject to CIT, undistributed estates, joint property entities and other entities to which article 35.4 of General Taxation Law 58/2003, of December 17, 2003 refers, are not deemed taxpayers. The income relating to them shall be attributed to the shareholders, heirs, joint owners or members, respectively, according to the pass-through tax regime established in the PIT Law.

2.2.2 Taxable event

Taxpayers subject to PIT are taxed on their entire worldwide income, including the income of foreign entities (international fiscal transparency system), unless the nonresident entity is resident of a EU Member State. This international tax transparency regime is similar to that described above for CIT.

2.2.3 Taxation system and taxpayer

The possibility of being taxed individually or jointly (as a family unit) is regulated. However, there is only one tariff but divided in two parts: the general one and the autonomous community one.

2.2.4 General structure of the tax

The law distinguishes between a general component and a savings component of taxable income. The general component is taxed according to a progressive scale of rates while the savings component is taxed at fixed rates (or according to a scale applied by income brackets).

The general and the savings net tax payable are calculated on the basis of the general and savings components after applying certain reductions.

Moreover, the general and the savings components of taxable income are calculated according to the categories of general and savings income; these categories constitute fixed compartments, with some exceptions, such that, within each category, the income items are integrated and offset against each other but without the possibility of offsetting losses with the losses of other categories of income. Within each category, there are even sub-compartments that cannot be offset against each other.

In this regard, the general component of taxable income is the result of adding the following two balances:

1. The balance resulting from adding and offsetting against each other, without limit, the following income and attributions of income:
   • Salary income.
   • Income from real estate.
   • Income from movable capital derived from the transfer of own funds to entities related to the taxpayer. This rule does not apply (in which case such income must be included as savings income) where:
     • They are entities of the kind provided for in Article 1.2 of Legislative Royal Decree 1298/1996, of June 28, Adapting the Law Currently in Force on Credit Institutions to the Law of the European Communities, provided that such income does not differ from the income that would have been offered to groups similar to the persons related to such institutions.
     • The amount of own funds assigned to a related entity does not exceed the result multiplying equity by three, to the extent that it relates to the taxpayer’s interest in the related entity.
   • Other income form movable capital which is not considered savings income, such as that derived from the assignment of the right to use the image, that from intellectual property when the taxpayer is not the author and that from industrial property which is not attached to business activities performed by the taxpayer.
   • Income from business activities.
   • Imputation of income from real estate.
   • Imputation of income from entities under the international fiscal transparency system.
   • Imputation of income from assignment of rights of publicity.
   • Changes in the value of units in collective investment undertakings established in tax havens.
2. The positive balance resulting from adding and offsetting against each other, exclusively, capital gains and losses excluding those which are deemed savings income. If its balance is negative, it may be offset against 25% of the positive balance, if any, of income and attributions. The rest of the negative balance will be offset in the following four years with the same setoff rules, it being obligatory for the setoff to be made of the maximum amount that the rules allow.

   The savings component of taxable income is calculated based on the savings income which is formed by the positive balance resulting from adding the following balances:

   1. On the one hand, the positive balance resulting from adding and offsetting against each other the so-called income from movable capital, that is:
      • Income derived from an entity due to the status of partner, shareholder, associate or stakeholder.
      • Income from movable capital derived from the transfer of own funds to third entities not related to the taxpayer or derived from related entities that meet the requirements in order not to be included as general income.
      • The monetary return or payment in kind on capitalization transactions and life or disability insurance contracts.

      If the inclusion and setoff of such income against each other leads to a negative result, this amount may only be offset against the positive balance of the capital gains and losses reported in the following component of savings income (paragraph b) below) with the limit of 25% of that positive balance.

   2. The positive balance resulting from adding and offsetting the capital gains and losses arising from the transfer of assets. If such result is negative, the amount thereof could be offset against the positive balance of the other component of savings income (paragraph a) above), that is, income from movable capital, with the limit of 25% of that positive balance.

      In both cases, if the balance is negative after those gains and losses have been offset, the amount thereof may be offset in the following four years.

2.2.5 Exempt income

The legislation establishes numerous items of exempt income.

Noteworthy among the exemptions is that relating to salary income for work performed abroad. This exemption will apply to salary income accrued during the days spent by the employee abroad up to a limit of €60,100 per year, if certain requirements are met:

• Salary income has to be paid in respect of work effectively performed abroad. Namely, the taxpayer must be rendering services physically abroad.
• In the case of services rendered by related entities to each other, an advantage or benefit occurs or may occur for the recipient.
• The recipient of the services must be either a non-Spanish-resident entity or a permanent establishment situated abroad of a Spanish resident company.
• A tax identical or similar to the Spanish PIT must exist in the other country, and such country must not be a territory classified as a tax haven. This requirement will be deemed to be met when the country or territory where the work is preformed has signed with Spain a tax treaty containing an exchange of information clause.

The exempt income received for work performed abroad must be calculated (i) by reference to the number of days that the worker actually spent abroad and the specific income relating to the services provided outside the country; and (ii) to calculate the daily amount earned for the work performed abroad, a proportional distribution method must be used, by reference to the total number of days in the year, aside from the specific income relating to the work performed.

In addition, an exemption is envisaged for capital gains arising on the transfer of the taxpayer’s principal residence, where the total amount is reinvested in the acquisition of a new principal residence within two years following the transfer date, under certain conditions.

Also relevant are the exemption for employee severance indemnities or termination benefits in the mandatory amount stipulated in the Labor Statute, in its enabling regulations or, if applicable, in regulations governing the enforcement of judgments, excluding amounts stipulated in agreements, clauses or contracts (limited to the sum of €180,000 for dismissals that take place since 1 August 2014), or the exemption for positive securities investment income from life insurance, deposits and financial contracts used to arrange Long-Term Savings Plans, provided the taxpayer does not utilize any Plan capital before the first five years have elapsed.

2.2.6 Earned income

The main aspects of the tax treatment of earned income are as follows:

1. Both cash income and income in kind are taxable.
2. The most relevant rules affecting income in kind are explained below:
   • In general, it is valued at the market value of the remuneration.
   • However, the Law provides special rules for certain types of income:

     The valuation of the income in kind consisting of the assignment of the use of vehicles is 20% per annum of the acquisition cost for the payer, or 20% of the value that would correspond to the vehicle if it were new (depending on whether or not the vehicle is owned by the company, respectively). The amount calculated must be weighted based on the percentage of private utilization of the vehicle. The value obtained may be reduced by up to 30% in the case of vehicles classed as energy-efficient.

     If the vehicle is handed over to the employee, it will be valued at cost less the value of prior utilization.

     The income in kind consisting of the use of housing owned by the company is limited to 5% or 10% of the ratable value, depending on whether or not this value has been revised, respectively, up to the maximum limit of 10% of the rest of the earned income.

     Other remuneration is valued at cost, such as meals and accommodation expenses.

   • In any event, the Law states that, irrespective of the above-mentioned general and special rules, the value of salary income in kind paid by companies engaged habitually in the performance of the activities that give rise to such income in kind (for example, where a vehicle rental company assigns the use of vehicles to its employees) may not be lower than the price charged to the general public for the good, right or service in question, applying ordinary or common discounts, and, in any case, with a limit of 15% or €1,000 per annum (whichever is lower).
   • Certain income in kind is not taxable.

     The award to current employees, free of charge or at below-market price, of shares in the company itself or in other group companies, is not taxable in the portion that does not exceed €12,000 per annum, for the total number of shares awarded to each employee, provided that the offer is made on the same terms for all the employees of the company, group or sub-group of companies and other requirements are met (basically related to keeping the shares for a certain period of time). In the case of start-up companies (see section 2.18), this exemption is increased to 50,000 euros per year and the offer need not be made in the terms referred to above.

     Furthermore, it is specified that in the case of deliveries of shares or holdings granted to employees of a start-up company (see section 2.18), the remuneration in kind will be valued at the value of the shares or holdings subscribed by an independent third party in the last capital increase carried out in the year prior to that in which the shares or holdings are delivered. If no such capital increase has taken place, they shall be valued at the market value of the shares or holdings at the time of delivery to the employee.

     Amounts paid to entities responsible for providing public passenger transport services to help employees to travel from their place of residence to their work center are not taxable, subject to the limit of €1,500 per annum per employee (indirect payment formulae that fulfill a number of conditions such as “transport passes / vouchers” are permitted).

     Restaurant vouchers and health insurance premiums are not taxable either, subject to certain quantitative limits; child care vouchers are also not taxable, subject to no limits.

     Of the different kinds of compensation, worthy of note (due to their special characteristics) are those derived from the grant to employees of stock options in the company of group where they provide their services.

   • In these cases, for stock options that are non-transferable (which is the most common scenario), salary income is generated when the employee exercises the options and receives the shares or holdings. In short, no income is generated when the options are granted but only when the options are materialized in shares or holdigns (with the vesting and subsequent or simultaneous exercise of the options). At that time, what is generated is salary income, for the difference between the market value of the shares or holdings received and the cost of the option.

     Subsequently, when the shares or holdings received are transferred, a capital gain or loss will be generated.

     Additionally, there are a series of tax benefits for this type of compensation:

     • As we have stated previously, the award of shares to serving employees, for free or for a price below normal market price, will not be deemed compensation in kind for the portion not exceeding, for the set of shares delivered to each employee, €50,000 or €12,000 per annum, depending on whether or not the shares or holdings in question are in a start-up company (see section 2.18), provided that certain requirements are met.

       If the delivery of shares or holdings results from the exercise of purchase options over share or holdings previously granted to employees by a start-up company (see section 2.18), the requirements to be classed as a start-up company must be met at the point at which the option is granted.

     • In addition, the reduction for multi-year income can be applied to the portion exceeding €12,000 or €50,000, as applicable, where the requirements analyzed below are met.
     • Effective as from January 1, 2023, there are express rules in place on the taxation of carried interest, meaning income obtained from the successful management of private equity entities. Specifically, it is expressly stipulated in the rules that this is earned income and that 50% of its amount shall be included without applying any exemption or reduction whatsoever, provided that: (i) the economic rights are conditional on the other investors in the entity obtaining a minimum level of profitability defined in the entity's regulations or bylaws, and (ii) the holdings, shares or rights are held for at least five years, unless a transfer following death occurs, or they are liquidated earlier or become null and void due to a change of management entity (this requirement being applicable, where appropriate, to the entities owning the holdings, shares or rights).
3. Reduction for irregular income.

   A 30% reduction is applicable to irregular income, which is defined as follows:

   • Income that is generated over more than two years, provided that the reduction has not been applied in the preceding five tax periods (this second requirement does not apply in the case of severance payments for dismissal or termination of a special or ordinary employment relationship).
   • Or income classed by regulations as being notably irregular over time.

   This 30% reduction may be applied to a maximum of €300,000 per annum (this limit is reduced for severance indemnities or termination benefits above €700,000, there being no reduction applicable to indemnities of €1,000,000 or more).

   Other types of reduction are applicable to certain earned income.

   When calculating the income, certain expenses are also deducted such as Social Security contributions, or a general reduction of €2,000 per annum for other expenses is applied (this reduction increases in certain circumstances).

   In addition, as from January 1, 2023, taxpayers with net earned income of less than €19,747.50 — provided that they do not have other non-exempt income, other than earned income, amounting to more than €6,500.00 — are to apply an additional reduction based on the amount of their income³⁴.

4. Lastly, entities resident in Spain will be required to make withholdings on earned income paid to their workers, irrespective of whether or not the income is paid by the entity itself or by a different resident or non-resident related entity.

 

2.2.7 Rental income

For the calculation of the net income all the expenses necessary to obtain it can be deducted.

The financial expenses and repair and maintenance expenses that can be deducted may not exceed the gross income generated by each property. However, the excess may be deducted under identical conditions in the following four years.

The remaining expenses may give rise to negative net income from immovable property.

In cases of leases of residential properties, a 60% reduction will apply to the net income (i.e. gross income less depreciation and amortization, non-State taxes and surcharges, etc.) provided it is a positive figure.

In addition, if the income was generated over a period exceeding two years, or if it was obtained at notably irregular time intervals, a 30% reduction will apply (reduction applicable to a maximum of €300,000).

2.2.8 Income from movable capital

Income from movable capital will generally be included in the savings component of taxable income, in the manner specified previously. This refers mainly to:

• The income derived from a holding in the equity of entities (such as dividends).

  Noteworthy in this type of income is the treatment of the holdings in open-end investment vehicles (SICAVs). In this regard:

  • In the case of capital reductions made to reimburse contributions, the amount of the reduction will be deemed income from movable capital, with the limit of the higher of the two following amounts: (i) that relating to the increase in the redemption value of the shares since their acquisition or subscription until the moment of the capital reduction, or (ii) where the capital reduction derives from retained earnings, the amount of such earnings. In this regard, it will be considered that capital reductions, regardless of their aim, affect firstly the portion of capital that derives from retained earnings, until that portion reaches zero.
  • Any excess over the limit determined according to the above rules will reduce the acquisition value of the relevant shares in the SICAV until it reaches zero, which will determine the future income deriving from the transfer. Nonetheless, any excess that might still exist will be included as income from movable capital derived from the holding in the equity of all kinds of companies, in the manner established for the distribution of additional paid-in capital.
  • These rules will also apply to the shareholders of collective investment undertakings equivalent to SICAVs and registered in another EU Member State (and, in any case, they will apply to the companies covered by Directive 2009/65/EC of the European Parliament and of the Council, of July 13, 2009, on the coordination of the laws, regulations and administrative provisions on certain collective undertakings for investment in transferable securities).

  In addition, with respect to the distribution of additional paid-in capital, the law establishes that the amount obtained will reduce, down to zero, the acquisition value of the shares or holdings concerned, and any resulting excess will be taxed as income from movable capital.

  Notwithstanding the preceding paragraph, in case of distribution of additional paid-in capital relating to securities not admitted to listing on any of the regulated securities markets defined in Directive 2004/39/EC of the European Parliament and of the Council, of 21 April 2004, on markets in financial instruments and representing the share in the equity of companies or entities, where the difference between the value of equity of the shares or holdings relating to the last fiscal year-end prior to the date of the distribution of the additional paid-in capital and the normal market value of the assets or rights received will be deemed income from movable capital, with the limit of that positive difference.

  • The income obtained from the transfer to third parties of own capital (such as interest).
  • The income from capitalization transactions and life or disability³⁵ insurance and the income from capital deposits.

  However, certain items of income from movable capital form part of the general component of the tax base:

  • Income deriving from the transfer to third parties of own capital, in the part relating to the excess of the amount of own capital transferred to a related entity, with respect to the result of multiplying by three the equity of the entity that relates to the holding. The aim of this rule is to prevent the tax rates of the savings component (which are lower) from being applied to cases in which the income derives from the debt of the shareholders with their investees where there is “excess in debtedness”, such that the financial income can be replacing income that could have been taxed in the general component of the tax base. Thus, for example, if the individual shareholder of an entity holds a 100% stake in it, to which equity of 1,000 corresponds, and he lends the entity 4,000, the interest on that loan will be included in the savings component only in the portion relating to 3,000 (3 x 1,000).
  • The items of income referred to in the law as “other income from movable capital”, which are income deriving from (i) intellectual property where the taxpayer is not the author; (ii) industrial property not assigned to economic activities; (iii) the lease of furniture, businesses or mines or from the sublease of such assets (received by the sublessor) which are not business activities, and (iv) the assignment of the right to exploit an image or from the consent or authorization for the use thereof, when the aforementioned assignment does not take place in the course of a business activity. In this case, a 30% reduction can be applied if they are generated over more than two years or are classified by regulations as notably multi-year in nature. Also in this case the reduction applies to a maximum amount of €300,000.

2.2.9 Capital gains and losses

As already noted, capital gains and losses are classified into two types: (i) those not deriving from transfers, and (ii) those deriving from transfers. The first type is included in the general component of taxable income and taxed at the marginal rate, and the second type is included in the savings component.

With respect to capital gains and losses, the following aspects are worthy of note:

1. In general, a capital gain or loss on a transfer, whether for valuable consideration or for no consideration, is valued as the difference between the acquisition and transfer values of the items transferred. In certain circumstances, however, these values are indexed to the market because they entail transactions in which there is no acquisition or transfer value per se. For example, in the gift of an asset, the gain is calculated as the difference between its cost and the market value of the asset at the date of the gift; or in the case of a swap, the gain is calculated as the difference between the acquisition value of the asset or right transferred and the higher of the market value of that asset or right and that of the asset or right received in exchange.

   In some cases, there are also rules aimed at guaranteeing the taxation of the actual income. For example, in the transfer of unlisted securities, the transfer value will not be the price thereof, but rather the higher of that price, the value of equity resulting from the last balance sheet closed before the tax becomes chargeable, or the value resulting from capitalizing at 20% the average of the results of the last three fiscal years closed before that tax becomes chargeable (unless it is proven that the transfer price is the market price).

2. Abatement coefficients: The law establishes the application of coefficients which reduce the gain deriving from the transfer. However, the application of these coefficients is only envisaged for the assets acquired before December 31, 1994.

   However, the coefficients do not apply to all the gain generated on the transfer but only to that generated until the legislation eliminated the coefficients, specifically up to January 19, 2006.

   In general terms, what must be done is to (i) calculate the amount of the “nominal” capital gain; (ii) distinguish the portion of that gain generated up to and including January 19, 2006, and the portion generated after that date (according to rules depending on the type of asset, the general rule being that of straight-line distribution) and (iii) apply the coefficients to the first-mentioned portion of the gain.

   The coefficients are (a) 11.11% in the case of real estate or real estate companies, for each year that has elapsed from the acquisition of the asset until December 31, 1994 (meaning that the gain generated up to January 19, 2006, from real estate acquired before December 1985, will not be subject to tax), (b) 25% in the case of shares traded on secondary markets (the capital gains generated up to January 19, 2006, deriving from assets acquired before December 31, 1991, not being subject to tax), and (c) 14.28% in the remaining cases (in which the gain generated up to January 19, 2006, from assets acquired before December 31, 1998 will not be subject to tax).

   The rest of the gain, i.e. which is deemed to be generated after January 20, 2006 (inclusive) will be taxed in full.

   In any event, according to the legislation applicable, the maximum amount of the asset transfer value to which these coefficients can be applied is €400,000. This €400,000 limit does not apply to the transfer value of each asset individually but to the total transfer value of all the assets as a whole to which the abatement coefficients apply starting on January 1, 2015, up to the moment when the capital gain is allocated. In other words, it is a global limit even if the sale of each asset takes place at different times.

3. Certain capital gains and losses are not deemed as such (and, thus, are not taxed or their taxation differs), namely (i) those deriving from the dissolution of jointly owned property or (ii) those resulting from the division of common property. At other times, the losses obtained are not computed, as occurs with (a) losses due to consumption or (b) those deriving from gifts. The Law also establishes an anti-abuse rule which prevents computing the losses deriving from the transfer of securities listed on organized markets when homogenous securities have been acquired in the two months before or after the transfer (the term is one year in the case of transfers of securities not traded on organized markets); in these cases, the losses are included as and when the securities remaining in the taxpayer’s assets are transferred.

   Of the capital gains or losses that are not subject to tax, worthy of note are those deriving from the gift of a family business, where (i) the assets were used in the economic activity for at least five years before the transfer date, and provided that the donor (i) is 65 years or older or suffers from absolute permanent disability or comprehensive disability, (ii) ceases to perform management functions and to be remunerated for those functions, and that the donee keeps the assets received for at least 10 years as from the date of the public deed documenting the gift, except in the case of death, and does not carry out any dispositions or corporate transactions which could lead to a significant decrease in the acquisition value of the business received.

   In addition, it is established, among other things, that the taxpayer will not compute the capital gains obtained on the transfer of units or shares in collective investment undertakings provided that the proceeds are reinvested in assets of a similar nature.

   In both cases, the new shares or units subscribed will maintain the value and the acquisition date of the shares or units transferred.

   Capital gains are also not deemed to arise from capital reductions. Where the capital reduction, regardless of its purpose, gives rise to the redemption of securities or holdings, those acquired first will be considered redeemed, and their acquisition value will be distributed proportionally amongst the rest of the analogous securities remaining in the taxpayer’s assets. Where the capital reduction does not affect all the securities or holdings owned by the taxpayer equally, it shall be deemed to refer to those acquired first.

   Where the purpose for the capital reduction is to reimburse contributions, the amount of the reduction or the normal market value of the assets or rights received will reduce the acquisition value of the securities or holdings concerned, in accordance with the rules of the preceding paragraph, down to nil. Any excess shall be included as income from movable capital derived from the share in the equity of any kind of entity, in the manner established for the distribution of additional paid-in capital, unless that capital reduction derives from retained earnings, in which case the sum of the amounts received for this item will be taxed in accordance with the provisions of letter a) of article 25.1 of this law. For these purposes, it shall be considered that the capital reduction, whatever its purpose, affects firstly the portion of the capital that derives from retained earnings, until they are reduced to zero.

4. Since January 1, 2017, proceeds obtained from a transfer of subscription rights arising from securities admitted to trading on any of the regulated securities markets defined in Directive 2004/39/EC of the European Parliament and of the Council, have been treated as a capital gain for the transferor in the tax period in which the transfer takes place. This was a change from the regime applied in previous years, in which proceeds obtained from a transfer of this right reduced the acquisition cost of the listed security in question. In other words, under the previous regime, the taxation of the gain obtained from the sale of preemptive subscription rights was deferred to when the share in question was transferred.

   In this case, the custodian and, in the absence thereof, the financial intermediary or the public authenticating official who has attested the transfer will be required to make the relevant withholding or prepayment for this tax.

5. There is an exemption for capital gains generated on the transfer of shares or holdings in newly or recently formed companies for which the tax credit for investment in newly or recently formed companies was applied (see section 2.2.13), providing the total amount obtained from the transfer is reinvested in the acquisition of shares or holdings that meet the following requirements:
   • Reinvestment in a public limited company, a limited liability company, a worker-owned corporation or worker-owned limited liability company that is not listed on any official stock exchange. This requirement must be met during all the years in which the shares or units are held.
   • Perform an economic activity with the personal and material means necessary to perform it. In particular, the activity of the company may not be the management of movable or real property assets in the terms established in the Wealth Tax Law, in any of the company’s tax periods ended prior to the transfer of the holding.
   • The entity’s equity cannot exceed €400,000 at the start of the tax period in which the taxpayer acquires the shares or holdings. When the entity forms part of a group of companies as defined in article 42 of the Commercial Code, regardless of residence and of the obligation to file consolidated financial statements, the equity figure will refer to the set of entities belonging to that group.
   • The shares or holdings in the entity must be acquired by the taxpayer either at the time of formation of the entity or through a capital increase carried out in the three years following that formation, and the taxpayer must keep them for a period of between three and twelve years.
   • The direct or indirect holding of the taxpayer, together with the holdings in the same entity owned by his/her spouse or any person related to the taxpayer by related by direct or collateral consanguinity or affinity up to and including the second degree, cannot be, on any day of the calendar years of ownership of the holdings, above 40% of the capital stock of the entity or of its voting rights.
   • They must not be shares or holdings in an entity through which the same activity is performed as that which was being performed previously under another title.

   In addition, it will be necessary to secure a certificate issued by the entity whose shares or holdings have been acquired, attesting to fulfillment of the first three requirements during the tax period in which the shares or holdings were acquired.

2.2.10 Reductions in the net tax base to adapt the tax to the personal and family situation of the taxpayer

The law establishes certain reductions for the portion of the net taxable income which is understood to be used to meet the taxpayer’s basic and personal needs, which is not subject to taxation:

1. The taxpayer’s personal allowance: €5,550 annually which will be increased by €1,150 annually for persons over 65 years of age and by €1,400 for persons over 75 years of age.
2. Allowance for descendants: For each unmarried descendant aged under 25, or descendant with disabilities regardless of age, or person under a guardianship or foster care arrangement living with the taxpayer, the taxpayer will be entitled to a reduction of €2,400 for the first, €2,700 for the second, €4,000 for the third and €4,500 for the fourth and subsequent of these. Where the descendant is aged under 3 the foregoing amounts will be increased by €2,800 annually.

   The family reductions will not apply if the taxpayers generating entitlement to these reductions file PIT returns obtaining income exceeding €8,000 or an application for a refund.

3. Allowance for ascendants: €1,150 for each ascendant over 65 years of age or a person with disabilities who lives with the taxpayer (or dependent boarders) who does not obtain income exceeding €8,000. For ascendants over 75 years of age it is increased by €1,400.
4. Allowance for disability: (i) Of the taxpayer: In general, €3,000 annually, although it will be €9,000 annually for persons who prove they have a disability equal to or greater than 65% (there will be an increase of €3,000 annually for assistance, if the need for assistance from third parties, or the existence of limited mobility or a disability of at least 65% is proven); (ii) Of ascendants or descendants: for those that confer a right to the above-mentioned allowances, a reduction of €3,000 per person and year, although it will be €9,000 annually for persons who prove they have a disability equal to or greater than 65% and an increase of €3,000 annually for assistance, if the need for assistance of third parties, limited mobility or a disability of at least 65% is proven.
5. For family units formed by spouses who are not separated and, where relevant, underage children or persons with disabilities, before the application of the personal and family allowances, a reduction will be made of €3,400 which will be applied, first of all, to the regular net tax base (which may not be negative) and subsequently, if there is a surplus, to the savings net tax base. This prior reduction will be €2,150 for single-parent family units, except in cases of living with the father or mother of one of the children that form part of the family unit.

2.2.11 Determination of the net taxable income

The general component of net taxable income will be the result of applying to the general component of taxable income the reductions for situations of dependence and old age and for contributions to social provision systems, including those established for persons with disabilities, contributions to protected estates of persons with disabilities and reductions for compensatory pensions. The application of the above-mentioned reductions may not generate a negative general net tax base.

Notable among these reductions are those deriving from contributions to employee welfare systems. Thus, making these contributions will reduce the tax base by the lower of the following amounts:

1. €1,500³⁶
2. 30% of the sum of net earned income and income from economic activities.

   This limit is increased in the following cases, by the amounts indicated:

• If the amounts contributed derive from contributions made by the employer or from contributions made by the employee to the same provident instrument, in which case the limit can be increased by an additional €8,500, provided the contributions made by the employee are equal to or less than the result arrived at by applying to the employer’s contribution a certain coefficient which depends on the annual amount of the employer’s contribution³⁷:
  1. 2.5, if the annual contribution amounts to €500 or less.
  2. 2, if it amounts to between €500.01 and €1,000.
  3. 1.5, if it is between €1,000.01 and €1,500.
  4. 1 if it is more than €1,500.

  In any event, the multiplier applicable is 1 when in the year the worker obtains gross earned income above €60,000 from the company that makes the contribution, for which purpose the company must inform the entity managing or insuring the provident instrument that this is not the case.

  In this case, any amounts contributed by the employer that stem from a decision by the employee will be treated as contributions made by the employee.

• By €4,250 per annum, provided that such increase derives from contributions to the sectoral pension plans envisaged in article 67.1.a) of the revised Pension Plans and Funds Law, made by self-employed workers or independent contractors who sign up to those plans on account of their activity; contributions made to the simplified occupational pension plans for self-employed workers or independent contractors envisaged in article 67.1.c) of the revised Pension Plans and Funds Law; or from own contributions made by the individual employer or professional to occupational pension plans, of which they are sponsor and also participant, or to welfare mutual insurance companies, of which they are member, as well as any made to company employee welfare plans or group dependence insurance policies of which they, in turn, are policyholder and insured.

In all cases, the maximum reduction allowed as a result of applying the increases referred to under points 1) and 2) above is €8,500 per annum.

In the case of group care policies taken out by employers to cover pension obligations, it places an additional annual €5,000 cap for premiums paid by the company.

In addition, contributions to pension plans in which the taxpayer’s spouse is the participant or member may also qualify for a reduction provided that the spouse does not obtain earned income or income from business activities, or where such income is lower than €8,000 per annum. The maximum reduction limit is €1,000³⁸ and the contribution is not subject to IGT.

If the general net tax base is negative, it can be offset with the positive net tax bases of the following four years.

The savings component of net taxable income will be the result of deducting from the savings tax base the remainder (not applied to reduce the general tax base), if any, of the reduction for compensatory pensions, but such operation may not lead to a negative savings net tax base.

2.2.12 Determination of the gross tax payable: Tax rates

The gross tax payable is calculated by applying the tax rates to the net tax base. Specifically:

• On the one hand, what we could call the “general gross tax payable” is calculated by applying the progressive scale of tax rates to the general net tax base and subtracting from it the result of applying the same scale to the personal and family allowances.
• On the other hand, what we could call the “savings gross tax payable” is calculated by applying the savings scale of tax rates to the savings net tax base.

There is not just one tax scale but rather there is a national scale and an autonomous community scale. Thus, a taxpayer in Madrid, for example, will apply to his or her net tax base both the national scale and the Madrid autonomous community scale.

The taxpayer’s place of habitual residence determines the autonomous community in which income is deemed to be obtained for PIT purposes. The law also lays down specific rules to prevent tax-motivated changes of residence.

The tax scales do not vary on the basis of the type of return (joint or separate) chosen by the taxpayer.

For fiscal years 2022 and following years, the total tax scale (national plus autonomous community rates) applicable to the autonomous communities that have not approved a specific autonomous scale is as follows:

Total tax scale (general component)

Net taxable income (up to euros)	Gross tax payable (euros)	Rest of net taxable income (up to euros)	Tax rate applicable (%)
0.00	0.00	12,450	19%
12,450	2,365.50	7,750	24%
20,200	4,225.50	15,000	30%
35,200	8,725.50	24,800	37%
60,000	17,901.50	240,000	45%
300,000	125,901.50	Onwards	47%

Further, the savings component of net taxable income not corresponding to the remainder of the personal and family allowances will be taxed according to a scale of fixed rates. That means that the general national and autonomous community scale for fiscal years 2021 and following years is as follows:

Total tax scale (savings component)

Net taxable income (up to euros)	Gross tax payable (euros)	Rest of net taxable income (up to euros)	Tax rate applicable (%)
0.00	0.00	6,000	19%
6,000	1,140	44,000	21%
50,000	10,380	150,000	23%
200,000	44,880	100,000	27%
300,000	71,880	Onwards	28%

The sum of the amounts resulting from applying the national and regional tax rates to the general net tax base and to the savings net tax base as described will determine the national and regional gross tax payable respectively.

2.2.13 Net tax payable and final tax payable: Tax credits

The national net tax payable and the autonomous community net tax payable are the result of deducting from the national and autonomous community gross taxes payable (in the relevant percentages) some tax credits, such as (i) the tax credit for investment in newly or recently formed companies; (ii) the tax credit for economic activities; (iii) the tax credits for donations; (iv) the tax credit for income obtained in Ceuta and Melilla, and (v) the tax credit for actions to protect and publicize Spanish historical heritage and that of cities, monuments and assets declared to be world heritage. The autonomous community net tax payable, moreover, will be calculated taking into account the tax credits which may be established by the autonomous community in question exercising its powers.

Of all of them, the tax credit for investment in new or recently formed companies is worth noting above all. This tax benefit permits deducting, as from January 1, 2023, 50%³⁹ of the amounts paid for the subscription of shares or holdings in new or recently formed companies where the following requirements are met:

• The entity whose shares or holdings are acquired must: (i) take the form of Corporation, Limited Liability Company, Worker-Owned Corporation or worker-owned Limited Liability Company, and (ii) perform an economic activity with the personal and material means necessary to perform it. Moreover, (iii), the entity’s equity figure cannot exceed €400,000 at the start of the tax period in which the taxpayer acquires the shares or holdings (when the entity forms part of a group of companies as defined in article 42 of the Commercial Code, regardless of residence and of the obligation to file consolidated financial statements, the equity figure will refer to the set of entities belonging to that group).
• The shares or holdings in the entity must be acquired by the taxpayer either at the time of formation of the entity or through a capital increase carried out in the three years following that formation, and the taxpayer must keep them for a period of between three and twelve years.
• The direct or indirect holding of the taxpayer, together with the holdings in the same entity owned by his/her spouse or any person related to the taxpayer by related by direct or collateral consanguinity or affinity up to and including the second degree, cannot be, on any day of the calendar years of ownership of the holdings, above 40% of the capital stock of the entity or of its voting rights.
• They must not be shares or holdings in an entity through which the same activity is performed as that which was being performed previously under another title.

The maximum tax credit base, as from January 1, 2023, will be €100,000 per annum⁴⁰ and will be formed by the acquisition value of the shares or holdings subscribed.

Mention should also be made of the deduction introduced with effect as from January 1, 2018 for taxpayers whose other family members reside in another Member State of the EU or EEA, the purpose of which is to bring Spanish legislation into line with EU law and address situations in which a taxpayer is prevented from filing a joint tax return by the fact that other members of the family unit reside outside of Spain. The deduction is applied to make tax payable equal to the amount that the taxpayer would have borne had all the members of the family unit been resident for tax purposes in Spain.

Effective as from 2023, a tax credit for energy-related improvement works to homes has been introduced. This allows for the application of a credit for up to 20% of amounts paid as from the entry into force of Royal Decree Law 19/2021 of October 5, 2021 on urgent measures to boost the renovation of buildings in the context of the Recovery, Transformation and Resilience Plan, and up to December 31, 2023, for work carried out during such period to reduce the need for heating and cooling at the taxpayer's main residence or at any other property owned by the taxpayer and leased for use as a dwelling at that time, or which is intended to be leased out, provided that, in the latter case, the dwelling is leased before December 31, 2024.

The deduction is applicable in the tax period in which the energy efficiency certificate is issued. The maximum annual base is €5,000. Additional credits are established in relation to the improvement of energy efficiency.

The application of the tax credits cannot lead the (national and autonomous community) net tax payable to be negative.

The final tax payable is the result of deducting from the total net tax payable (autonomous community plus national) the sum of the international double taxation credits, the withholdings, payments on account and split payments and the deductions of the underlying tax in relation to income attributed by international fiscal transparency or due to assignment of image rights.

The final tax payable may be reduced in turn by the maternity tax credit (subject to the limit of €1,200 annually), the deductions for large families or disabled dependent persons (with the limit of €1,200 or €2,400, depending on the case).

2.2.14 Withholdings

Payments of income from movable capital, gains on shares or units in collective investment undertakings, salary income, etc. are subject to withholding at source (or prepayment, in the case of compensation in kind) which is treated as a prepayment on account of the final tax.

The base and rate of withholding and prepayment for the main types of income are detailed in the table below:

Income		Base	Rate applicable in 2016 onwards
Salary income	General. (*)	Total compensation paid or satisfied.	See paragraph below table.
	Contracts of less than a year.		See paragraph below table (minimum 2%).
	Special dependent employment relationships.		Minimum 18%.
	Board members.		35%. (*****)
	Courses, conferences and licenses on literary, artistic or scientific works.		15% or 7%.
Income from movable capital (**)	General. (***)	Gross consideration claimable or paid.	19%.
Professional activities	General.	Amount of income or consideration obtained.	15%.
	Start of fiscal year + following 2 years.		7%.
	Certain professional activities (municipal collectors, insurance brokers, etc.).		7%.
Capital gains(**)	Transfers or redemption of shares and holdings in collective investment undertakings. (****)	Amount to be included in the tax base calculated according to personal income tax legislation.	19%.
	Cash prizes.	Amount of prizes.	19%.
Other income (**)	Lease/sublease of urban real estate.	Amount of income and rest of items paid to the lessor or sublessor (minus VAT).	19%.
	Income derived from intellectual property, industrial property, from the provision of technical assistance and from the lease or sublease of movable assets and businesses.	Gross income paid.	19%. (******)
	Authorization to use image rights.	Gross income paid.	24%.

 

1. The withholding rate is reduced by two percentage points (without it being able to be negative), for the salary income of taxpayers who have notified the payer of their salary that a portion thereof is used to acquire or refurbish their principal residence for which they use external financing and in respect of which they will be entitled to the tax credit for investment in the principal residence, provided that the total amount of their expected annual income is less than €33,007.20.
2. The establishment of a flat withholding tax/tax prepayment rate of 19% in these cases means that the tax difference between 19% and 21% (in the case of net tax bases exceeding €6,000) must be paid over when filing the relevant tax self-assessment.
3. The amount of the tax prepayment to be made in respect of compensation in kind is calculated by applying the withholding rate to the result of increasing the acquisition value or the cost for the payer by 20%.
4. In general, the withholding obligation will not exist if the transferor decides to reinvest the proceeds obtained on the transfer, acquisition or subscription of other shares or units in collective investment undertakings (deferral regime envisaged in article 94 of Law 35/2006).
5. Directors and board members (of entities whose net revenues from the last tax period that ended prior to the payment of income were < €100,000) will be subject to a withholding rate of 19%.
6. With effect as from January 1, 2019, a 15% withholding tax rate is applicable to revenues from intellectual property, when the taxpayer is not the author.

In order to calculate the withholdings applicable to salary income, the procedure (explained simply) consists of taking the total gross salary income and reducing it by certain deductible expenses and reductions to determine the net salary income. The withholding tax scale (aggregation of the national and the autonomous community scales) is then applied to the result of the calculation. The same process must be followed with the personal and family allowances, to which the withholding scale is also to be applied separately. The difference between the two operations gives rise to the withholdings payable. The withholding rate applicable is then determined by dividing the withholdings by the total salary income. In short, the calculation of the withholding tax rate is very similar to the calculation of the definitive tax rate, albeit with certain special features, indicating that the legislature’s intention was to bring them closer together.

2.2.15 Formal obligations

The tax period coincides with the calendar year. However, if the taxpayer becomes deceased on any date other than December 31, the tax period will be shorter than the calendar year.

Likewise, the tax becomes chargeable on December 31 of each year, unless the taxpayer becomes deceased on another day, in which case the tax becomes chargeable on the date of death.

Taxpayers who are required to file a PIT return (Form 100) must, when filing their returns, calculate the tax payable and pay it over in the place and manner and by the deadlines determined by the Ministry of Finance. The deadline is usually June 30.

Taxpayers who are married and not legally separated, and who are obliged to file a PIT return under which tax is payable, may request the suspension of their tax debt in an amount equal to or less than the refund to which their spouse is entitled for the same tax and in the same tax period.