Spanish tax advice that could cost you dear

As I am sure the whole of Spain knows by now the annual tax return season has just ended. The Spanish tax office (Agencia Tributaria or more colloquially La Hacienda) have issued some interesting stats about the tax campaign which I have summarised below. But before coming onto that, I must point out an error on a website popular with ex-pats (Euroresidentes.com) which could have serious repercussions if anyone believed it. They say, in answer to the question “I am a foreign resident, I live in Spain and receive a monthly pension from England. Do I have to declare tax in Spain?”:

No. If you collect your pension in England must comply with tax laws of that country with respect to their income. Only people who have a job or a pension in this country have to declare that income in Spain.

This is absolutely incorrect as we describe on our website: Do I have to do a Spanish tax return?

Anyone who is tax resident in Spain – generally those living here more than half of a calendar year – has to do a tax return and declare all their income including income earned outside of Spain. The only exception is if this income falls below certain levels (see Spanish income tax rates 2011 for these) or if the overseas income is exempt from Spanish tax. There are few such exemptions, the most common being income from a “crown” pension (basically a UK government pension which is, because of the UK-Spain tax treaty, taxed only in Britain).

So I hope no one has read this kind of advice and decided they don’t need to do a tax return because they have no Spanish job or pension. If for example they are living off foreign savings (e.g. offshore bank account interest) it is highly likely that not declaring will come back to haunt them. It is also worth noting that all foreigners who become Spanish tax resident should declare in the first year of becoming resident regardless of the sources or level of their income.

As for the Hacienda’s stats (see Agencia Tributaria website), these revealed:

The average wage declared on tax returns was 22.596€. Given that the law paid do not have to do returns the average wage of all Spanish people must be a lot lower.

2/3 of taxpayers had wages less than 21.000€ a year. Only 3,8% declared gross salaries in excess of €60.000

There were around 1.5 million business declarations and 600.000 autonomos declaring

About 12.7 million declarations were made seeking a tax rebate and so far 6.2 billion € has been returned to taxpayers

Things to remember about your Spanish tax return

AA very Spain-centric blog this week and at that one that will only be of any interest to people who are Spanish tax resident, declare their taxes and have not already done so. A few reminders:

Everyone who lived in Spain for 183 or more days in 2010 should be submitting a tax return. There are exceptions and if your income is below certain levels then you don't have to declare (but see below). To see these levels visit Spanish income tax rates 2011

If your income is too low to declare it may still be wise or even obligatory to do so: wise because you may have a tax rebate due; obligatory in your first year of residence regardless of income levels. If you never declare La Renta you will never be considered tax resident which can put you at a disadvantage when it comes to paying other taxes like capital gains and inheritance.

The deadline for submitting your Spanish tax declaration "La Renta" is the end of June but to submit allowing the tax office to take your tax (or repay your tax) directly from your bank account, as opposed to paying cash, you should declare by 27th June.

If you are tax resident but have the non resident tax exemption (Beckham's Law) and have been paying the flat rate 24% all year you do not have to do a tax declaration; any non Spanish income is not taxable.

You can pay in two installments to spread the tax burden - 60% at the end of June and 40% in November.

Deductions are available for rent and housing costs paid, including mortgage repayments, if income is below 24.000 level

Mothers of young children (under three) who are working can claim an extra allowance (see Spanish maternity benefit)

If you have rental income it must be declared but if you are renting out a property as a dwelling ("vivienda") you can claim a deduction of up to 60%. If you are renting out a foreign property (e.g. UK) but pay the tax on it in that country you can leave it off your Spanish tax return.

If you have foreign income (i.e. non Spanish) which is not denominated in Euros it needs to be translated at the exchange rate prevailing at the point at which you earned the income. For regular receipts through the year an average rate is acceptable.

Getting a Spanish tax refund

There aren't many nice things about being a tax accountant. It's not a great ice-breaker at parties and you sometimes feel a bit like a dentist or a doctor delivering bad news when you have reckoned up someone's liability and have to tell them. But then there are those lovely occasions when your client gets some money back and you get the "shoot the messenger" syndrome in reverse ("hug the messenger"?) because they are so surprised and grateful.

This scenario is particularly rewarding when you have come up with the idea that got the tax refund in the first place and the recent Spanish tax reporting season threw up some good examples of this.

Refunds can only occur when someone has paid too much tax during the year and they have submitted an annual tax return after the year is over which proves as much: the Agencia Tributaria will credit their bank account with the difference. What I mean by "paying too much tax during the year" is that the Spanish government take automatic retentions of tax from people's income as it arises and, as this is done on a flat rate taking no account of people's personal circumstances, too much can be taken. Examples of such retention payments taken by the government are:

- % deductions of bank interest

- retentions from salary (like PAYE in England)

- deductions from dividends paid by companies

- retentions paid on self employed earnings

- rental income retentions

The most common reason why people find they have paid too much out in retentions is that they have low income overall compared to their personal allowances (tax free income allowance). This often happens when people start work or start a business part way through the year so they get a full year's personal allowances to use against a part year's income. Also a married couple can claim the higher Spanish married couples allowance when only one of them is earning.

Such refunds are one good reason why it can often pay to do a tax return particularly if you take advantage of all the allowances available to you. There are allowances such as for young children (under 3) and against rent paid that can lead to a tax refund in the right circumstances.

Anyone wanting more details of how the Spanish tax system works should check out the Advoco page Spanish Income Tax 2010.

Why Spanish Income Tax is not as bad as it sounds

If you move to Spain from abroad it's probably for the weather, the lifestyle or for the opportunity to start again. Almost certainly not to get up close and personal with the Spanish tax system. But it's almost unavoidable: if you live in Spain you almost certainly will have to declare your income to the Tax Office and pay your tax here. There are exceptions and this guide will help clarify things:

Do I need to do a Spanish tax return?

So if you are like most of us and have to declare Spanish taxes then is it going to hurt? Well it depends on how much you earn of course but there are some reasons to be cheerful:

Exemptions:

Us foreigners have a few exemptions we may be able to call on. For example there is a 60,000€ tax free allowance for income earned and taxed abroad and another exemption for new arrivals who want to be taxed as non-residents. See details here.

Crown pensions (those paid by the government to for example civil servants, army, police) are exempt from Spanish tax and don't have to be declared.

Allowances:

You get personal allowances where no tax is payable in Spain as you do in the UK. The allowances for 2009 are:

Everyone €5.151 (€6.069 for over 65s and €6.273 for over 75s)

Disability allowance - up to €6.900

1st child €1.836 2nd child €2.036 3rd child €3.636 4th child €4.182 (plus maternity allowance of €2.244 for children under three)

Earnings related allowance - €4.080 for earnings up to €9.180 reducing to €2.652 for earnings above €13.260.

(pensions count as earned income for this purpose)

Deductions:

• * Credit is given for all tax deducted at source whether this be in Spain (e.g. “retenciones” deducted by banks on interest or employers on salaries) or abroad, if there is a tax treaty in force.
• * Any payments into the Social Security system are deductible.
• * There are important deductions allowable in the calculation of rental income – for residents but not non residents – and capital gains on property sales.
• * Homeowners can deduct 15% of their mortgage costs (subject to limits)
• * Pension contributions are tax deductible (subject to limits)
• * The first €1.500 of dividend income is tax exempt.
• * As a crisis measure the government introduced a €400 tax credit for all employees and self-employed persons in 2009. This is to be abolished from 2010.

If you want to learn how you can make your Spanish tax filing as painless as possible please come and talk to Advoco. If you like send me a private email at jb@advoco.es

Busy, busy - Spanish Tax season looms

It's all tax at the moment. Lots of enquiries responding to our Spanish Tax Advice page. I think it is the time of year, even though the actual deadline for annual tax returns here is the end of June. Once New Year is firmly out of the way you tend to feel it's time for a big push to get some unpleasant jobs out of the way; and it doesn't get much more unpleasant than sorting out your tax affairs.

But like most jobs you put off (cleaning the oven, bathing the dog, thank you letters) it's not so bad when you get on with it. And there's that lovely feeling of having achieved something when you get it done.

Being nice people at Advoco we have taken steps to ensure that the tax reporting season (May and June for residents, later in the year for non-resident property owners) is not too painful. For a start we have published a guide to whether or not you need to do a tax return:

http://www.advoco.es/services/39-do-you-need-to-submit-a-spanish-tax-return.html

Also we are aiming to contact clients before the mad rush in May to get everything together well ahead of time. If you are not registered for tax in Spain we are taking care of that by post so you don't have to go to your local Tax Office. Otherwise we are doing as much as possible by email so you can do everything from home and at your own pace. We are also trying to make payments possible without going into the bank.

Enough of the sales pitch; in future posts I'll publish some info about what sort of things you have to declare, allowances you get and the rates you will pay. Right, back to answer some of those emails.

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