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Madrid region offers tax break to draw foreign investment

Madrid's conservative regional government on Tuesday unveiled a new tax break intended to attract overseas investment and act as a "counterweight" to the fiscal policies of Spain's leftist central government.

Published: 17 January 2023 17:38 CET

Madrid region offers tax break to draw foreign investment

Leader of Madrid Isabel Diaz Ayuso to offer regional tax breaks. Photo: ANDER GILLENEA / AFP

The move sets up a clash between Spain’s wealthiest region and Socialist Prime Minister Pedro Sánchez’s government ahead of regional elections in May and a general election expected at the end of the year.

Under the regional plan, foreigners or expatriate Spaniards will be able to deduct 20 percent of the value of their investments in real estate or financial assets from their income tax bill.

The regional government is introducing the measure because it is “worried” about the possible impact Spain’s new tax on “large fortunes” will have on overseas investment, regional economic policy chief Javier Fernandez-Lasquetty said.

READ ALSO: Why you should move to this region in Spain if you want to pay less tax

Last year Sánchez’s government introduced a temporary wealth levy on people
with assets worth at least €3 million.

The tax will be collected in 2023 and 2024, and the money raised used to help households struggling with the effects of high inflation.

But the head of the Madrid regional government, Isabel Díaz Ayuso, of Spain’s main opposition Popular Party (PP), argues Sánchez’s tax policies will cause investment in Spain to “plummet”.

READ ALSO – EXPLAINED: What are Spain’s new regional tax breaks?

She said last week the tax break that her government was planning aimed to “send a clear message to the international investment community that there are institutional counterweights and an alternative to” Spain’s central government.

Polls show her PP is ahead of Sánchez’s Socialists but would struggle to secure an absolute majority in parliament.

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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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