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TAXES

Spain’s Valencia region lowers income tax for yearly earnings under €60K

Valencia's regional president has announced a reduction in income tax for the vast majority of taxpayers as part of a series of reforms that include free transport and other tax benefits for residents of the eastern Spanish region.

Published: 27 September 2022 15:35 CEST
spain valencia region income tax reduction
According to Puig, taxpayers in Valencia will save €111 on average this year. Photo: José Jordan/AFP

Valencian regional president Ximo Puig announced on Tuesday September 27th a series of financial reforms intended to make tax outcomes in the coastal Spanish region more progressive.

The headline grabbing reform is a reduction in income tax rates for those earning under €60,000 gross a year, something that benefits 97.4 percent of Valencian taxpayers (1.34 million workers).

The new income rates will be retroactive and apply to earnings from January 1st 2022, thus reflecting on the 2022 annual income tax declaration carried out next year.

“Incomes of €10,000 will save 21 percent (around €94.5),” Puig explained, and “those of €20,000 will save 7.3 percent (€117). Those of €30,000 will save 2.2  percent, or €67.”

Spain’s Personal Income Tax (IRPF) is a state tax, but half of its collection is controlled by the autonomous communities.

As such, each region can change its income tax brackets, like Puig has on Tuesday, and the reductions he has announced will apply to the 50 percent of IRPF collected by the Valencian regional government – it does not represent a reduction in the overall income tax rate.

Valencianos with incomes over €60,000 will not see any change to their income tax.

During his announcement, Puig gave the example of a young single person under 35 earning €28,000 and paying €8,000 on their mortgage who will pay €530 less in their next tax return.

According to the calculations from the Ministry of Finance, a couple who have an 80-year-old dependent relative, earn €30,000 and file a joint tax return would reduce their net regional tax liability by €162.

It is worth noting that that Generalitat is yet to formalise the reforms in writing, so the specifics (and savings) are not yet 100 percent clear. 

Reform measures

The reduction in income tax was announced alongside two other major policies: an increase in tax-exempt minimums, and increases to tax deductions.

The tax-exempt threshold for earnings will be increased by 10 percent for both personal and family incomes, taking it up to €6,105, allowing 33,000 low-income Valencia residents to not pay income tax.

According to Puig, taxpayers in Valencia will save €111 on average this year.

The politics of inflation

Describing the reforms as ‘progressive’ not ‘elitist’ in what many in the Spanish media have interpreted as criticism of the recent People’s Party tax reform across Spain, including in Madrid led by Isabel Díaz Ayuso, and the slashing of a wealth tax in Andalusia, Puig, leader of PSOE in Valencia, claimed his changes will benefit “families with lower income” and improve “the redistribution of wealth” in the region.

READ MORE: Spain’s Andalusia to scrap wealth tax in bid to attract high earners

“That’s the difference, ladies and gentlemen,” Puig said, “here we keep the wealth tax, a tax for which only 0.5 percent of Valencians are taxed… those who have a wealth of more than half a million euros.” 

Mortgages

The reforms also included a tax deduction of €100 for some mortgages, and a promise to build 1,090 new homes on public land in the Valencian Community.

Transport changes

Puig also announced that Valencian public transport (including all metro, tram and bus services) will be free for children and young people under 30 years old from October 9th until the end of the year.

The measure will benefit around 1,553,000 young people across the region and save them €135 each.

Fertility tax deduction

A tax deduction for fertility treatments for Valencian women who cannot be treated in the public health system for reasons of age or low probability of pregnancy was also announced as part of the tax reforms.

READ MORE: How Spain’s politicians are waging a tax war ahead of 2023 elections

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TAXES

How wealthy people in Spain are avoiding the millionaire tax

It may come as no surprise that the Spanish government has collected far less money than expected from the millionaire tax, as wealthy people have found several ways to avoid paying it.

Published: 16 April 2024 09:40 CEST
Updated: 20 April 2024 07:23 CEST
How wealthy people in Spain are avoiding the millionaire tax

Spain’s temporary tax on the super rich (impuesto de solidaridad a las grandes fortunas) is usually referred to as the millionaire’s tax or solidarity tax. It’s a tax on people worth more than €3 million and it’s not a tax on income, but rather on assets and holdings.

It was introduced by the country’s left-wing coalition in an attempt to help Spaniards weather the economic storm of the cost-of-living crisis. But as of September 2023, around a year after the tax measure was first brought in, the Spanish government reported that it had raised €623 million in revenue, a decent amount but considerably less than the initial projection of €1.5 billion. We now may know why that is.

According to tax data, the millionaire’s tax targeted just 12,010 payers, which represents barely 0.1 percent of the total taxpayer base in Spain.

On average these high-worth individuals each paid €52,000, which is complementary to the Wealth Tax (impuesto patrimonio).

However, though it was supposed to be a temporary tax measure, there’s now some uncertainty about exactly how temporary it is going to be in the long-run. The government has been making non-comital noises as of late, and amid the uncertainty many wealthy Spaniards have begun trying to find ways around paying it and trying to reduce their wealth tax bill overall.

READ ALSO: When will Spain’s millionaire tax be scrapped?

Donations

A lot of it comes down to ‘donations’ in order to make the money non-taxable or to reduce the taxable base on paper.

Spanish tax consultancy firms consulted by elEconomista.es report an increase in requests for help arranging ‘donations’ from parents to children or spouses in recent years, as well as the arranging inheritance agreements in the regions that allow deductions to offset the tax burden of the millionaire’s tax.

Donations are sometimes done through money and shares, but donating properties also seems to be a way of avoiding extra taxes, although property donations can work out more expensive due to the procedures to be followed and the taxes to be paid on property transactions in Spain.

The aim is to avoid paying the millionaire’s tax by splitting up the fortune, essentially because donations between family members is a way to reduce the level of wealth (on paper) and thus keep it below €3 million, the taxable base from which the millionaire’s tax is levied.

This trick is even more beneficial in regions where donations are subsidised, such as Madrid and the Balearic Islands, where inheritance agreements can be made, because any capital gain generated by the donation is not taxed.

READ ALSO: Inheritance tax in Spain – Should you pass your property on to your children or sell it to them?

Venture capital firms

Another method increasingly used by the wealthy seems to be setting up and putting money in venture capital or private equity firms.

According to Spain’s National Securities Market Commission, the creation of venture capital firms has grown by 38 percent since the government first announced the millionaire’s tax.

Siro Barro, partner in charge of tax law at Escalona de Fuentes, told El Economista that setting up venture capital firms are appealing because 60 percent of the investment made by creating a fund or equity can be exempt from both forms of tax in certain circumstances.

Tax experts expect the trend of creating and investing by the wealthiest taxpayers into private equity entities to continue to rise as long as the solidarity tax continues to exist, as with the donations loophole.

With the government yet to outline when this supposedly temporary tax will be scrapped (if at all), it seems these sorts of tricks, whether through donation or venture capital investment, are here to say.

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