Non-Resident Income Tax: What is it and why do I have to pay it?

Non-Resident Income Tax: What is it and why do I have to pay it?

par | Nov 25, 2016 | Tax

The determining factor regarding what kind of Income Tax a natural o legal person pays in Spain is residence. Residents pay regular Income Tax (IRPF) or Corporation Tax (IS), and non-residents, both natural and legal persons, must pay Non-resident Income Tax (IRNR).

Who is a resident?

The first question to answer is who is considered a resident for tax purposes. This consideration must not be confused with the legal status of resident, which I have explained in detail y my previous post “Living and working in Spain”.

Natural persons (private individuals) are considered resident in Spain for tax purposes if they remain in Spain for more than 183 days of the calendar year.

Anyone who does not find themselves in this situation will be considered a Non-Resident Income Tax payer insofar as they obtain income or own real-estate in Spanish territory.


Income to be declared on real-estate in Spain

According to Spanish law, non-resident natural persons who own urban real-estate assets in Spanish territory, for their own personal use, rather than for economic activity or which are vacant, are subject to Non-Resident Income Tax for the income obtained from these buildings. To clarify, although there is no actual income received in these cases, a “fictional” income is calculated based on the value of the said property. This is not to be confused with the local Property Tax (I.B.I.), the payment of which does not exempt you from Non-Resident Income Tax.

If you are renting out your property you will have to declare the income you obtain from said rental.

Will I be notified I have to pay?

The system for collecting taxes in Spain is different to that in many other countries. Under the Spanish system you will not necessarily be reminded that you owe tax, it is your responsibility to make sure you are up to date on your tax payments.

However, this does not mean you won’t be caught for not paying your Non-Resident Income Tax. The Spanish Tax Authority is increasingly cross-referencing information to identify where there are irregularities (including monitoring electricity consumption and Land Registry records, among other measures).

A letter may be sent to your Spanish address notifying you of your obligation to pay Non-Resident Income Tax, though this is not necessarily the case and not receiving such a letter does not exempt you from your tax obligation. Even in the event that this letter is sent out, if you are not there to receive it at the time it is issued, as many who are not residing permanently in Spain may not be, then the letter will be returned to the Spanish Tax Authority.

When do I have to pay?

The 31st December is the deadline every year, by which time non-residents must have filed their annual Non-Resident Income Tax return for the previous year (e.g. deadline for 2019 tax return is 31st December 2020).

Consequences of failing to pay

The main consequence of non-payment is that the debt with the Spanish Tax Authority will be held against your property and, as a result, will have to be settled before you are able to sell your property, or before your heirs are able to inherit it.

In addition, you may have to pay late payment interest, as well as the appropriate tax sanctions, the funds in your bank account could be seized, or you could become the subject of one of the Spanish Tax Authority’s anti-fraud campaigns.

It is for all of these reasons that it is essential that non-residents seek a professional and experienced fiscal representative who is in a position to make sure your taxes are paid on time, receive notifications on your behalf, represent you to the Spanish Tax Authority, inform you of changes to Spanish tax law and answer all your queries on the matter.

Gabriella Mary Trussler Rowland
Lawyer
4408 Ilustre Colegio de Abogados de Almería

Inheritance Tax reform in Andalucia

Inheritance Tax reform in Andalucia

par | Nov 5, 2016 | Inheritance, Tax

Finally, a much needed change to Inheritance Tax in Andalucia has arrived and will be coming into effect on the 1st January 2017. With Andalucia being one of the poorest regions of Spain it was becoming increasingly difficult to justify it being the region with the highest level of Inheritance Tax, forcing many inheritors to renounce their inheritance because of the unaffordable tax bill that came with it. Consequently, a restructuring of the tax had long been a matter of debate and negotiation, on a regional as well as a national scale.

 

Higher threshold

The main change brought about by the new Inheritance Tax reform is the increase of the general threshold from 175,000 € to 250,000 € for each individual beneficiary. This means that as long as the value of the part of the entire estate being inherited is under this amount, no Inheritance Tax will be owed by said heir.

In addition, to inheritances of between 250,000 € and 350,000 € a 200,000 € reduction is applied (e.g. if an inheritor’s share is valued in 270,000 € tax will only be due on 70,000 €). The effect of this change is to correct the leap that currently exists where, the moment the inheritance is even a euro over the threshold, Inheritance Tax is owed on the entire amount. This circumstance quite clearly placed inheritors at a comparative disadvantage, and was one of the main criticisms made of Inheritance Tax regulation in Andalucia.

 

Main residence

Another important change is the introduction of increasedallowances for the inheritance of the deceased’s main residence by spouses, ascendants or descendants, or collateral relations over 65 years-old. Specifically, a 100 % allowance is applied when the value of the property is under 123,000 €, which reduces 1 % each time as the property value band increases, with the minimum allowance being 95 % when the property is valued at anywhere over 242,000 €.

Furthermore, as of the 1st January the beneficiary will now only be required to maintain ownership of the property for 3 years, as opposed to 10 years as it stands at the moment.

 

How is the tax rate calculated?

The above allowance, together with any other allowance the heir may be entitled to, is applied to the amount above the general threshold to determine the taxable amount.

Once we have the taxable amount the Inheritance Tax scale is applied, as well as a coefficient that depends on the relation to the deceased and the inheritor’s existing assets, to determine the tax rate that applies. All of these aspects remain unaltered by the tax reform.

 

Will this apply to UK residents post Brexit?

The regional allowances for Andalucia in the event that both the deceased and the beneficiary are EU residents. When this is not the case, only state allowances may be applied, which are far fewer.

Therefore, depending on the result of the negotiations between the UK and the EU, these regional allowances will continue to be applied to UK residents post Brexit, or not.

 

It is important that all of these circumstances and potential costs are taken into account when preparing your will, so as to organise your will and manage your wealth in a way that will be most beneficial to yourself and your inheritors. All of which makes seeking professional assistance in these matters essential, to avoid any unexpected and costly surprises when it’s too late.

 

Gabriella Mary Trussler Rowland
Lawyer
4408 Ilustre Colegio de Abogados de Almería