Spanish Tax System Overview as a Foreigner
Moving to Spain as a retiree has significant tax implications, primarily centered on your tax residency status, which determines your tax obligations on a worldwide basis. Here is an overview of the Spanish tax system for a person moving to retire in Spain:
Golden Rule: Tax Residency is Everything
The most critical concept is tax residency.
- If you live in Spain for more than 183 days per year (about 6 months), you’re considered a Spanish tax resident.
- Residents are taxed on their worldwide income (pensions, investments, rental income abroad).
- Non-residents are only taxed on Spanish-sourced income (like renting out a property in Spain).
This overview assumes you will become a Spanish tax resident.
The Main Tax for Retirees: Income Tax (IRPF)
This is the tax on your annual income, including your pensions. Spain has a progressive tax system, meaning the rate increases as your income does.
- Who Manages It?: There are two levels:
- State Tax Agency (Agencia Tributaria): Sets base rules.
- Autonomous Regions (Comunidades Autónomas): They have the power to set their own rates and deductions. l. You will file your return based on where you live on December 31st of the tax year.
- Tax Rates (Approximate 2024):
- General income: from work, pensions, rentals, etc. rates generally range from 19% to up to 47%
- Savings income: Interest, dividends, and capital gains are taxed apart at 19%–28%.
- How Pensions are Taxed: Your total pension income (from any country) is declared as general income on your tax return. There are exemptions and deductions for retirees.
General income: Rates are applied in brackets. Here’s a general idea (exact brackets change annually).
| Taxable Income Band (€) | National Rate (%) | Example: Andalucía Regional Rate (%) | Combined Marginal Rate (%) |
|---|---|---|---|
| 0 – 12,450 | 9.5% | 9.5% | 19% |
| 12,450 – 20,200 | 12.0% | 12.0% | 24% |
| 20,200 – 35,200 | 15.0% | 15.0% | 30% |
| 35,200 – 60,000 | 18.5% | 18.5% | 37% |
| 60,000 – 300,000 | 22.5% | 22.5% | 45% |
| > 300,000 | 24.5% | 24.5% | 49% |
Wealth Tax (Impuesto sobre el Patrimonio)
This is a tax on your net worldwide assets (what you own minus what you owe) if their total value exceeds a certain threshold.
- Who Pays?: Tax residents whose worldwide net wealth exceeds €700,000. Importantly, there is a main home exemption up to €300,000.
- How it Works: You only pay tax on the amount above the threshold. Rates are progressive, starting from 0.2% to a maximum of 3.5% (varies by region).
- Regional variation: Many regions, particularly popular with retirees like Andalucía, Madrid, and the Canary Islands, have effectively 100% relief on this tax. This means if you reside there, you likely will not pay any Wealth Tax. This is a major factor in choosing where to live.
- Rates: Rates are progressive, typically between 0.2% and 3.5%.
Modelo 720 (Worldwide Assets Declaration – Informative)
- This is not a tax, but a mandatory declaration if the total value of your assets outside of Spain (bank accounts, investments, properties) exceeds €50,000 in any category.
- You must file it once within the first year of becoming a resident, and then only if your foreign assets increase by more than €20,000.
As a Spanish tax resident, you must file the Modelo 720 (Declaration of Assets Abroad) to report foreign assets if the value of any of the following three categories exceeds €50,000 as of December 31st:
- Accounts in financial institutions abroad.
- Securities, rights, annuities, or life insurance deposited, managed, or contracted abroad.
- Real estate and rights over real estate located abroad.
This is an informative declaration (no tax is paid with the form itself), but failure to file or filing incorrectly can lead to significant penalties
Inheritance and Gift Tax (Impuesto sobre Sucesiones y Donaciones)
- This is a tax on money or assets you receive from an inheritance or a gift.
- It is notoriously high in Spain, but again, the autonomous regions offer significant reductions and bonuses, especially for direct family members (spouses, children). Retirees in regions like Andalucía benefit from massive deductions, making it minimal or zero for close relatives.
- Regional Variation: This tax is highly regionalized, meaning the rates and allowances depend heavily on the Autonomous Community where the beneficiary resides and their relationship to the deceased/donor. Allowances can vary from being very generous to very limited.
Local Taxes
- IBI (Impuesto sobre Bienes Inmuebles): An annual property tax paid by the owner of a property in Spain. It’s based on the “cadastral value” of the property and is generally low (from €50 in a small town to €500 in Madrid).
- Basura (Garbage Collection Tax): A small fee for trash collection, billed by the local town hall (€50).
- Annual car fee: is the Impuesto de Circulación, a tax paid to your local town hall. The cost is based on your car’s engine size and varies by municipality (from €50 to €150).
Key Considerations for Retirees from Abroad
Double Taxation Treaties
Spain has treaties with many countries (including the US and UK) to prevent you from being taxed twice on the same income. You will declare your worldwide income in Spain, but you can claim a credit for any tax already paid in the source country
Pension Reporting: You must declare your foreign pensions on your Spanish tax return. The treaty determines if Spain has the primary right to tax it (which it usually does for residents).
Usually:
- Private pensions → Taxed in Spain.
- Government pensions (military, civil service) → Often taxed only in the country of origin.
It depends on the treaty, so you’ll need to check your specific situation.
Summary Checklist for a Retiring Expat
- ✅ Determine your tax residency status (183-day rule).
- ✅ Declare your worldwide income (especially pensions) on your Spanish income tax return.
- ✅ Investigate the specific tax benefits of your chosen Autonomous Region (especially for Wealth Tax and Inheritance Tax).
- ✅ File the Modelo 720 if your foreign assets exceed the thresholds.
- ✅ Pay local taxes like IBI and Basura.
- ✅ Hire a professional tax advisor (asesor fiscal).
This system can be very favorable for retirees, particularly in regions that offer tax incentives, but navigating it correctly from the start is crucial to avoid problems.
Tax Advisor is Essential
This cannot be overstated. The Spanish tax system is complex, especially with foreign assets and pensions. A gestor or asesor fiscal (tax advisor) who specializes in expatriate taxation is a worthwhile investment to ensure compliance and optimize your position. They will help you with the annual income tax declaration (Declaración de la Renta).