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BANKING

What you need to know about investing in index funds in Spain

Index funds are considered a safer and more passive way of investing for those with little financial knowledge. However, understanding what they are, the best funds available, and how they're taxed in Spain is key before investing your money.

Published: 12 March 2024 11:30 CET
Updated: 16 March 2024 05:55 CET
What you need to know about investing in index funds in Spain
The IBEX 35 stock market index at Spain's principal stock exchange in Madrid. Photo: GABRIEL BOUYS/AFP.

What are index funds?

According to a basic definition by Banco Santander, “index investment funds are collective investment undertakings whose investment policy strives to mimic a certain index.”

What does that actually mean? And what is being mimicked here? Let’s look at an example. An index fund tracking the Vanguard Global Stock Index, for example, will put together an asset portfolio that essentially mirrors, or is similar to, at least, the Vanguard portfolio, in terms of composition. 

So that means that if the Vanguard Index has any major changes in terms of portfolio makeup, the fund manager (more on the best of those in Spain below) changes your index fund to reflect that change.

Often in Spain index funds would be linked to the IBEX 35, Spain’s main stock exchange, but many people invest in regional or global funds too. Besides that, index funds basically function in the same way as other funds: the money in the fund is used to buy and sell assets to make profit.

Generally speaking, the benefits of index fund investing are their low cost, the little financial knowledge and time investment required from the investor, and their diversification. The drawbacks are the lack of downside protection when there are losses, the lack of choice in index composition, and the fact that your investments can’t ‘beat’ the market.

READ ALSO: The best high-yield savings accounts in Spain

How profitable can index funds be?

Owing to the fact that the entire point of index funds is to mimic a particular index, the way we think about profitability is slightly different than with other forms of investment.

In that sense, there’s really no such thing as a ‘good’ or ‘bad’ index fund based on its performance. How well the index fund performs is better thought of as how well it replicates the index it is supposed to be mimicking.

According to Rankia, a Spanish investment service and comparison site, index funds vary wildly in terms of returns, but compound annualised returns ranging from as low as -40 percent in the worst case examples to 55 percent profits in the best.

Obviously, how much you make in cash terms depends on the size of your original investment in the fund.

Can you invest in foreign index funds in Spain?

Yes, you can. In fact many people do, and fund managers often recommend doing so.

In Spain, the main fund managers that offer index funds include iShares, EBN Bank, Amundi, Vanguard, Pictet, Bankinter, Caixabank, BBVA, and Credit Suisse.

Which are the best index funds to invest in from Spain?

Most index funds are grouped on a regional basis, so there are several funds that mirror European markets, North American markets, the Pacific region markets, and so on, as well as broader global index funds.

According to Rankia, some of the best global index funds to invest in from Spain include:

Fidelity MSCI World Index Fund P-ACC-EUR
Total Expense Ratio (TER): 0.12 percent
3-year return: 11.73 percent

Vanguard Global Stock Index Fund EUR Acc
TER: 0.18 percent
3-year return: 11.63 percent

Amundi Index MSCI World – IE (C)
TER: 0.19 percent
3-year return: 11.51 percent

Vanguard ESG Developed World All Cap Equity
TER: 0.20 percent
3-year return: 9.29 percent

Vanguard Global Small-Cap Index Fund
TER: 0.29 percent
3-year return: 7.37 percent

Amundi Index FTSE EPRA NAREIT Global – AE (C)
TER: 0.34 percent
3-year return: 3.17 percent

How are index funds taxed in Spain?

Under the Spanish tax system, index funds are taxed as savings income as part of the IRPF (Spain’s income tax) and are included as capital gains and losses, as if they were any other type of stock market shares or investment product.

However, one of the advantages of index funds over other forms of investment is that if you sell one index fund in order to buy another, you don’t pay for the capital gains obtained because it is considered a transfer from one fund to another and is therefore exempt from taxation.

This makes it one of the best investment options if you want to get a higher return on your earnings via compound interest because you can take advantage of these capital gains to reinvest them instead of paying them in taxes.

As index funds in Spain are taxed in the same way as any other investment products that is subject to savings rates, they are taxed at the following rates:

19 percent for capital gains of less than €6,000

21 percent for capital gains between €6,000-€50,000

23 percent for capital gains in excess of €50,000

READ ALSO: Bank overdraft in Spain: What are the risks and penalties?

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TAXES

How foreigners in Spain’s capital can pay less tax with the new Mbappé Law

The regional government of Madrid is finalising the approval of the so-called Mbappé Law, a very favourable new personal income tax regime for foreigners who settle and invest in the Spanish capital.

Published: 23 April 2024 16:44 CEST
Updated: 27 April 2024 08:19 CEST
How foreigners in Spain's capital can pay less tax with the new Mbappé Law

Similar to Spain’s Beckham Law, introduced in 2005, this piece of legislation is named after a famous footballer who will be the first to benefit from lower tax rates, as will other foreigners in Madrid.

Kylian Mbappé is a French footballer who currently plays for Paris Saint-Germain, but looks set to sign for Real Madrid this summer.

The objective of the right-wing Madrid government of Isabel Díaz Ayuso is to attract more foreign investment to the region with beneficial fiscal rates.

READ ALSO – Beckham Law: What foreigners need to know about Spain’s special tax regime

Unlike the Beckham though, the Mbappé Law is only designed to benefit foreigners who move to the region of Madrid, it’s not open to those who want to move elsewhere in Spain.

Also unlike the Beckham law, foreigners will only be able to reap the rewards of the Mbappé Law if they invest money into the region. This could be in the form of investments in companies or in vehicles, but it cannot include investments in property.

Specifically, applicants will be able to deduct 20 percent of all the money they invest in the Madrid region.

The law applies to regional personal income tax, which accounts for approximately half of entire tax payments in Spain, since the other part corresponds to the State’s collection.

Normally, a foreigner like Mbappé will be taxed in the highest income bracket, as they will earn well over €300,000 gross per year.

When the law is finally approved however, Mbappé could avoid paying the regional income tax entirely, in the event that 20 percent of his Madrid investments represent the same amount that he would have had to pay in taxes on his salary.

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

How will the Mbappé Law work?

For example, if Mbappé earned €40 million gross (not his actual salary), he would normally be charged €18 million in personal income tax.

Of this, 24.5 percent would correspond to the state tax, and this would have to be paid as normal. This means the state would collect €9.8 million from him in tax.

The change happens with the rest of the tax – the regional tranche. If he doesn’t make any investments, which now seems unlikely, he would have to pay €8.2 million in tax to Madrid.

If on the other hand the French superstar invested €40 million in Spanish companies or state bonds – he could deduct €8 million, which represents 20 percent of that amount.

This would mean that Mbappé’s tax rate would remain at 24.5 percent, a marginal rate that is slightly higher than the personal income tax for a worker who earns €20,000 and receives around €1,300 net per month.

As a percentage, of course, the amounts in Mbappé’s case are going to be huge. So, instead of paying €18 million in total, he would only pay €9.8 million.

Overall, this legislation signals that Madrid will become even more attractive to foreign investors.

By contrast, those who move to Catalonia will have to pay 25.50 percent in regional income tax, which added to the 24.5 percent of the state tax would increase personal income tax by half. So as a Real Madrid player Mbappé would earn €30.2 million, but if he signed for Barça he would pocket €20 million.

What’s the catch?

There are a few caveats to the new law, which primarily depend on how long you stay in Madrid. The new regulations establish that you have to stay and live in Madrid for a total of six years. If you leave before those six years are up, then you will be forced to return part of the tax savings you made.

What does this mean for Madrid?

The regional government of Madrid estimates that 30,000 foreign investors could choose to move to the region specifically in order to benefit from the new law and that it will cost the public coffers €60 million per year.

The idea is that Madrid will continue to attract foreign investment. Madrid’s leader Isabel Díaz Ayuso recently claimed that: “Two out of every three euros that arrive in Spain as an investment from abroad do so in projects that are developed within the Community of Madrid. In the last decade, the flow of investments has doubled”.

Madrid already has some of the best tax incentives in Spain. Residents pay less tax on their income, assets, inheritance and property transactions and conditions are beneficial to high-income earners in particular.

Financial experts agree that Madrid is among, if not the top region, with the most lenient tax system in the country, and when the Mbappé law comes into force, the region will benefit from even more incentives.

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