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Spain to slap new tax on millionaires whilst cutting taxes for low earners

Spain will cut the income tax of low-earning households and introduce a new tax for residents whose wealth exceeds €3 million, the latest chapter in the fiscal war being waged between the left-wing national government and its right-wing regions.

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"Since we began governing, we have been working to make our fiscal system more progressive, efficient and strong enough to support social justice," Spain's Budget Minister María Jesús Montero said. (Photo by GABRIEL BOUYS / AFP)

The government will reduce the income tax on people earning up to €21,000 ($20,200) per year, or one in two workers, Budget Minister María Jesús Montero told a news conference om Thursday.

At the same time, she confirmed the government will slap a new tax in 2023 and 2024 on residents whose wealth exceeds €3 million to help pay for inflation relief measures.

This so-called “solidarity” tax will affect some 23,000 people, or 0.1 percent of taxpayers, and raise €1.5 billion for state coffers over the two years, she added.

Prime Minister Pedro Sánchez’s government announced last week that it would create a temporary tax on the wealthiest population without giving details.

“Since we began governing, we have been working to make our fiscal system more progressive, efficient and strong enough to support social justice,” Montero said.

The announcement of the tax changes comes as Spain is gearing up for local elections in May 2023 and a general election expected at the end of next year.

Last week, the right-wing leader of Spain’s southern Andalusia region decided to axe wealth tax and lower income tax in a bid to attract wealthy taxpayers.

Within a matter of days, Valencia’s left-wing regional president announced a reduction in income tax for the vast majority of taxpayers in the eastern autonomous community. 

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

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

Spain is battling a surge in inflation as a result of the fallout from the war in Ukraine and the reopening of the economy after pandemic-related lockdowns.

The country’s inflation rate eased to 9.0 percent in September as energy prices fell, down from 10.5 percent in August, but remains high.

Sánchez has in recent months rolled out aid packages to help households and businesses weather the inflationary pressure, which has soared across Europe due to the Ukraine war.

It has introduced free public transport, subsidised petrol prices and temporarily slashed the sales tax on gas among other measures, in moves that are expected to cost some 30 billion euros — or 2.3 percent of Spain’s gross domestic product.

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The big tax declaration change Spain’s self-employed need to know

If you're self-employed in Spain there are a few new changes you need to be aware of when it comes to submitting your income tax return this year.

The big tax declaration change Spain's self-employed need to know

As if being self-employed in Spain wasn’t complicated enough, there are several new changes you should know about for 2024. 

The Personal Income Tax (IRPF) campaign for 2023 campaign runs from April 3rd to July 1st this year. This means you must submit your annual Declaración de Renta for the money you earned last year between these dates. 

This year is different for autónomos because you’ll be required to present your tax return whether you had losses or profits in 2023. In previous years, it was only necessary if you had profits over a certain threshold or if it was your first year filing it.

READ ALSO: Everything that changes for self-employed workers in Spain in 2024 

But this year, even if your business has not performed as expected and you actually incurred a loss, it will still be mandatory to present these to the Tax Agency. 

According to experts from the financial comparison site Banqmi, “The Tax Agency does not have complete information on the activity of each self-employed person and that is why an adequate check and verification must always be carried out”. 

The second change that’s new for this year is that the percentage of expenses you are allowed to deduct has been raised from 5 to 7 percent. 

READ ALSO – La Renta: What items can you deduct on your Spanish tax return?

Banqmi expert Antonio Gallardo, states: “It is important to note that only the self-employed who carry out professional activities who are not an actual business, and who do so through the direct estimation regime, are entitled to this right, therefore, those who do it by modules are excluded”. 

The direct estimation regime is when taxes are calculated based on the actual income and expenses of the business during the fiscal year. This means that net profit or loss is calculated by subtracting the deductible expenses of the activity.

READ ALSO: Nine mistakes to avoid when filing your Spanish tax return

The types of tax deductions those on this type of regime can apply include:

  • Monthly Social Security contributions
  • Deductions for the vehicle usage (if it applies to your business)
  • Deductions for business-related training expenses
  • Special deductions, such as research and development expenses
  • Tax relief at a regional level

When it comes to regional tax deductions, self-employed workers have access to special rates depending on the region they live and work in. For example, Madrid, Asturias and the Canary Islands offer these types of tax reliefs.

READ ALSO – Q&A: What is Spain’s flat fee for new self-employed workers?

Additionally, during the first year of being registered as self-employed, 20 percent of your profits can be deducted. If this is the case, you have the right to apply the same deductions as a company registered for Corporate Tax (25 percent of research and development expenses for example).  

One of the main obstacles for self-employed workers when filing their annual personal income tax return is that the Tax Agency does not have complete information on all transactions carried out. 

“Although they receive information about part of your expenses and income, this is incomplete, so you must always carry out adequate verification to avoid errors and the hassle of making rectifications or complementary statements,” Banqmi experts conclude. 

If you’re unsure about any of your tax returns this year, whether you have to file, and exactly what you can deduct, it’s important to contact your gestor or a tax advisor. Remember that everyone’s situation is slightly different. 

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