Living in Spain – The Ultimate Guide to Filing your US Taxes

Online Taxman staffUS Expat Tax

living in spain US tax guide

living in spain US tax guideSpain is famous for its weather, food, and culture. Countless US expats have made it their home. Whether you prefer city life in Madrid or the beaches of Costa del Sol, Spain offers a high quality of life. However, many US expats find that living in Spain can complicate their tax obligations.

Whether you are an employee or an entrepreneur, there are several things to keep in mind each year.

In this (long) post we explore the key tax factors you need to know when living in Spain as American expat, including

  • What you need to know about the Spanish tax system
  • How to determine residency status
  • Implications of owning property in Spain (especially the wealth tax)
  • Corporate taxes for business owners in Spain
  • How to reduce your tax burden in the US and Spain
  • How expats can save tax with the Beckham Law
  • The required declarations to stay in compliance

What expats need to know about the Spanish tax system

As a US expat in Spain, it is helpful to understand how the Spanish tax system works. Here we provide a high-level overview. For Spain-specific tax advice, please consult a tax accountant specialized in the Spanish tax system.

The Spanish tax agency is known as the Agencia Tributaria. Spanish tax returns are filed with this agency.

The Spanish tax year runs from January 1 through December 31. Spanish tax returns are due between April 6 and June 30.  This means that US expats in Spain typically file for an extension for their US taxes because they are waiting for their Spanish tax documents.

Spain has a progressive tax system. The calculation of individual taxes involves many different factors.

As a general overview, tax residents in Spain expect the following tax brackets for employment income in 2019:

Income amountTax rate
€0-€12,45019%
€12,450–€20,20024%
€20,200–€35,20030%
€35,200–€60,00037%
Above €60,00045%

As you can see, Spain’s tax rates are fairly high. On the positive side, Spain and the United States have created agreements that can save expats money and help avoid double-taxation.

US Spain tax treaty helps expats avoid double taxation

The Tax Treaty between the United States and Spain deals with income taxes between the two countries.

This Income Tax Convention with Spain, the official name of the treaty, helps determine which taxes should be paid to which country in a variety of situations.

These documents are highly complex and technical. For this reason, it is especially important to work with a US accountant who is familiar with the challenges for expats in Spain.

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Spain US social security totalization agreement

The Totalization Agreement between Spain and the United States determines social security payments and distributions. Depending on several factors, social security payments will either go to the US or to Spain.

This agreement also applies to those who are self-employed. It stipulates that if you are self-employed in Spain, you do not need to pay self-employment tax in the States.

Nevertheless, self-employed US expats in Spain still need to notify the IRS that they are paying Social Security in Spain. They should file a statement with their US tax return to state this.

Am I a tax resident of Spain?

Before discussing more of the Spanish tax system, we want to point out that Online Taxman specializes in US taxation. We do work with a global network of partners in key countries, who can help you with local taxes.

In general, foreigners are a tax resident of Spain, if any of the following applies:

  • Spending 183 days or more in Spain during the year
  • Having vital business interests in Spain
  • Your spouse or children are Spanish residents

Tax residents of Spain must pay taxes on their worldwide income and declare all assets over €50,000.

Fortunately, tax residents of Spain can use deductions and credits to reduce their US tax liability. You may be able to claim deductions for items such as investments in your home, foreign tax credits, business activities, and maternity leave.

Non-residents of Spain still pay tax

For non-residents, the tax burden and reporting requirements are usually significantly less.

However, non-resident status is not a way out of all taxes. Even non-residents still need to pay taxes in Spain on Spanish-sourced income and on any property they own.

Non-residents also must pay other taxes including:

  • Wealth tax
  • Tax on investment interest
  • Tax on dividends
  • Capital gains tax for transferred assets

For non-residents, the general income tax is 24% for Spanish-sourced income. This is a flat tax, meaning it applies the same regardless of income level. This is a significant reduction from the tax rate for many Spanish residents.

Unfortunately, as a non-resident using the flat general income tax, you cannot claim any deductions.

Owning property in Spain as an American expat

Expats owning property in Spain typically must pay local property taxes. This local property tax is known as Impuesto Sobre Bienes Inmuebles or IBI. A non-resident property owner makes the property tax declaration on Modelo 210.

Non-resident property owners are liable for two types of property tax. The first is the regular local property taxes and the second is an income tax for potential rental income.

Local property taxes vary based on the region the property is located in.

Any property taxes paid in Spain are deducted from any rental income to arrive at the net income. The income taxes paid to Spain for rental income are fully creditable on the US return.

Likewise, if you sell your property, there are several Spanish taxes you will need to pay. The primary tax is the Impuesto Transmisiones Patrimoniales. This is the property transfer tax.

You will also need to pay a tax to the local authorities for the increase in the value of the property. This is referred to as Plus Valia.

For your US tax return, this tax can either be a credit to the capital gains tax or an adjustment to the basis of the property (reducing the capital gains) depending on the type of tax. Talk to an experienced expat tax accountant.

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The wealth tax in Spain

Spain also has a wealth tax. This tax was abolished in 2009, but it was later reinstated. The wealth tax is based on the value of your assets.

The tax rates are the same regardless of residency status. The rates range from 0.2% to 2.5%. The tax is applied based on the value of all assets held on December 31 each year.

However, there is a key difference in the wealth tax for residents and non-residents.

For residents, the wealth tax is applied to their worldwide assets. Non-residents only pay the wealth tax on their Spanish assets.

The base threshold for the wealth tax is an estate value of over €700,000.

Luckily, there is a benefit for residents. Spanish residents receive an additional €300,000 allowance for the value of their own home before they must pay the wealth tax.

To calculate the estate value, include high-value assets such as:

  • Real estate
  • Bank deposits
  • Jewelry and fur coats
  • Racing cars, boats, and airplanes
  • Art
  • Antiques
  • Some intellectual property rights
  • And more.

Fortunately, some business assets are exempt from the wealth tax.  Consult a tax accountant to find out more.

Corporate taxes for business owners in Spain

For business owners living in Spain, one of the primary concerns is the potential corporate tax.

In Spain, the general corporate tax rate is 25%. This is a flat tax. However, there are some ways to lessen this burden.

For example, new limited companies can pay reduced taxes. For the first two years of business, limited companies only pay 15% on the first €300,000 of profit.

In addition, by locking your profits into a special reserve for five years, you can receive a 10% reduction in tax.

Taxation for US expats in Spain owning a US corporation or an offshore company depends on the specific situation. Our sister company Global Expat Advisors specializes in tax-optimized offshore structuring. Click here to schedule a consultation.

The Beckham Law offers expats in Spain a reduced tax rate

The Spanish government created a program to encourage expats to move to Spain. This program offers foreigners who move to Spain a fixed income tax rate of 24% for the first six years they live there.

The famous soccer player, David Beckham, used this program shortly after its creation. Thus, the program was nicknamed “Beckham Law.”

Under the Beckham Law, only income earned within Spain is taxed. This is a huge benefit. But the fixed tax rate can only be applied to income up to €600,000.

In short, this program allows expat to be a non-resident for tax purposes.

Foreigners must meet two conditions to qualify. First, they must not have lived in Spain for the last 10 years. Second, they are an expat employee who has come to work for a Spanish company.

However, there are some exceptions to the employment requirement. Generally, you can also become eligible by becoming a director of a Spanish corporation or through employment at a foreign company established in Spain.

Expats looking to move to Spain should remember that treatment under the Beckham Law must be requested. It is not automatic.

How American expats in Spain can reduce their tax burden in the US

Get credit for taxes paid in Spain with the Foreign Tax Credit

As an American expat in Spain, there are many things to consider before filing your taxes.

While each case needs special consideration, the Foreign Tax Credit is typically the best option for US expats in Spain.

This is because the tax rate in Spain is much higher than in the US. This difference in tax rates makes the Foreign Tax Credit often more advantageous than the Foreign Earned Income Exclusion.

However, there are situations where this is not the case.

For example, if you do not pay taxes in Spain because you are under the filing threshold, then the Foreign Tax Credit may not be optimal. In fact, you may want to claim the Foreign Earned Income Exclusion instead.

Again, this is a case-by-case evaluation that an experienced expat tax accountant can help with.

Offset the cost of living in Spain with the Foreign Housing Exclusion

Though the cost of living in Spain is lower than in many other European countries, Madrid and Barcelona are still fairly costly.

US expats can offset some common housing expenses by using the Foreign Housing Exclusion or Deduction. However, they can only do so if they qualify for and claim the FEIE.

US expats in Spain need to declare their assets

Despite these expat tax benefits, there are some extra obligations that come along with being a US citizen and a Spanish resident. Both governments require the declaration of certain assets.

Asset declaration to the US government

Americans with foreign financial accounts and specified foreign assets must report those to the US government using Fincen Form 114 (FBAR) and Form 8938.

The FBAR is used to report foreign financial accounts.

You may also need Form 8938 to report other types of assets such as mutual funds, foreign pensions, and other investments (video).

Both forms have reporting thresholds that you should be aware of before filing.

Asset declaration to Spain

Like the US, Spain also requires that you declare foreign assets. You can report these assets on the form known as Modelo 720.

Spain requires that you declare all foreign assets worth more than €50,000 that you have on December 31 each year. Contact a Spanish tax accountant for specific information.

Dealing with US taxes when living in Spain

Many US expats have made Spain their temporary or long-term home. However, complicated tax agreements between the countries can leave expats overwhelmed. This article is intended to give a general overview. It cannot replace advice from a qualified tax accountant, as every situation is different.

If you would like to avoid the headache and paperwork of expat taxes this year, contact Online Taxman for help.

Set up a free consultation with one of our expert expat accountants.

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