After such an eventful 2020 many working professionals and future retirees are asking themselves and us about how they can move to Spain and what are the key financial considerations. In this blog I hope to give you the key pieces of information to help you make an informed decision.
Most western EU countries have fairly similar tax and reporting systems in place and many operate off common regulatory guidance from such entities as the OECD and their Common Reporting Standards and national revenue commissioners. The Spanish tax system is fairly similar to the Irish tax system that you will be familiar with but there are differences in how certain assets are taxed and at what rates depending on where you live in Spain.
One surprise to many Northern Europeans that become resident in Spain is that Spain tax All Residents on their worldwide assets. This makes it imperative to consider how you earn and report your annual domestic and foreign sourced income and other assets you own. Any individual or married couple who spend more than 183 days in Spain need to be aware that their worldwide assets and income needs to be factored into their future financial planning.
Personal income tax rates
The two main sources of income in Spain can be categorised as;
- Savings taxable income –Investment income etc
- General taxable income – Income Tax, Pension drawdown, Inheritence, rental income etc
Spanish Tax: Savings Income
Residents are taxed on their worldwide savings income and non-residents on their Spanish savings income at a fixed rate. The rates for 2021 are as follows:
- €0 – €6,000: 19%
- €6,000 – €50,000: 21%
- Over €50,000: 23%
Savings taxable income includes interest income from deposit accounts, dividends, income from life assurance investment contracts along with capital gains arising from property or private company sales. There is reporting between the Irish & Spanish revenue so it is important to ensure you plan appropriately taking into account the Double Tax Agreement in place.
Spanish Tax: General Income
As mentioned earlier, Spanish residents (whether you are Irish, British or any other domicile) pay tax on their worldwide income on a progressive scale. General taxable income covers earned income (employment salary, self-employed income and bonuses and pension income), rental income, income from royalties, any capital gains not generated from the sale/transfer of assets such as lottery prizes.
It’s critically important to access whether you are actually a Spanish, Irish or British resident of course and this largely depends on how many days you spend in each country.
Tax rates may differ depending on the Spanish region (Comunidad Autónoma) of residency.
Treatment of Irish Pensions in Spain
Spanish residents with Irish pensions or occupational pension income are taxable in Spain and not in the Ireland, under the terms of the Ireland-Spain Double Taxation Treaty. This can vary depending on which pension vehicle you own. Some post retirement vehicles such as ARF’s, AMRF’s and Personal Retirement Bonds will likely be considered emoluments or salary income as they are not internationally recognised Pension structures. They will then be taxed at normal income tax rules on drawdown and also potentially have 25% tax by Irish revenue. You will then need to claim back any excess tax you have paid from the Spanish Hacienda (Revenue) which is not an optimum situation.
Defined Benefit (DB) and annuity based pension income can be tax efficient in Spain but selecting the right provider is crucial to avoid the many pitfalls of drawing your pension monthly income. Annuities are exceptionally bad value these days also so there is a fine balance between the type of pension and the tax and IHT planning.
It’s important to speak with Imperius Wealth regarding these Irish pensions before you set up residency in Spain but we can still advise you even if you are now currently in Spain.
Investing a Lump Sum
There are Spanish tax compliant insurance policies provided by Northern European firms that can be utilised for any investment (non-pension) lump sum. It is important to assess what type of investment products you hold Thereafter, annual tax on distributions of gains from this lump sum is calculated in tranches as follows:
- The first €6,000 is taxed at 20%
- 22% on the remainder up to €50,000
- 24% on amounts over €50,000
Expats can benefit from Spanish tax planning opportunities. For those already in the Spanish tax system, it’s likely best to forgo the usual 25% lump sum and take a higher annuity income as long as that annuity qualifies for the favourable tax treatment mentioned above. An Irish or UK tax resident planning to move permanently to Spain might consider taking the lump sum before they become resident in Spain. It’s important to do a full analysis of everything before you change residency.
QROPS in Spain
Irish Expats frequently choose to utilise a Qualifying Recognised Overseas Pension to benefit from some of the advantages Malta offers such as;
- Access at 50
- Eliminates double taxation potential
- No forced distributions
- No Standard Fund Threshold of €2m
- Multi-currency options
- Wide range of investment options
- Inheritance tax benefits (for beneficiaries outside Spain)
QROPS offer inheritance and succession tax advantages as the pension is held in trust. The individual does not directly own the assets within the trust; this creates a distance from ownership upon death. Any inheritance from the QROPS can thus be received free of Spanish succession tax.
Tax Reporting in Spain:
All residents of Spain are required by law to declare all assets they hold outside Spain worth more than €50,000 regardless of where you were born, previously resided or hold the assets themselves. The reporting regime and documentation to report this is known as Modelo 720.
Modelo 720 divides assets into three groups:
- Overseas property – Residential or Commercial
- Deposit accounts – held in overseas financial entities
- Financial assets (bonds, investments, pensions, insurances) outside of Spain
The Spanish tax authorities frequently give severe fines for any non- disclosure or incomplete reporting of foreign assets which can sometimes be as high as 150% of the value of the undeclared assets.
These can be retrospectively imposed for prior incidents of non-disclosure so it’s incredibly important to ensure full tax compliance. The OECD’s Common Reporting Standards regime has started reporting these from at least 2017 onwards.
Financial or Physical assets greater than €50,000 at 31 December each year (the official reporting date) is required to be reported. Future Modelo 720 reporting is only required when the reported asset increases by €20,000 on the previous stated value.
Needles to say Spain offers a fantastic low cost destination for Irish retirees who are looking to enjoy the lifestyle that Spain gives. It’s important to plan for this retirement though if you wish to avoid the gaze of Spanish revenue. There are reasonably simple steps you can take to avoid any unnecessary tax complications but you should really speak with someone in Imperius Wealth first to understand your options.
Please speak with one of our Chartered Financial Planners or Certified Financial Planners CFP® who can quickly and clearly guide you in the right direction.
Mike Shannon CFP®
Imperius Wealth Ltd
Imperius Wealth Limited 460677 is regulated by The Central Bank of Ireland No. 50457 and registered with the Financial Conduct Authority (UK) under freedom of services No. 534822