Spanish residents can be taxed as non-residents*
(* terms and conditions apply!)
This article discusses Beckham's law (or to give the tax rule its formal nameÂ Regimen especial para Trabajadores Desplazados, as per Title X on Special Tax Regimen, Section 5th, article 93 of the Spanish Income Tax Law (IRPF)) and the option of paying tax as a non-resident when living and working in Spain.
The basic idea behind Beckham's law
If you are a foreigner who has come to live and work in Spain you may well have heard of Beckham's Law. Â If not you probably should have because it is potentially very important to your tax position. Â The law in essence allows Spanish resident taxpayers to pay tax as if they were non-residents for a period of 5 years. Â This is what the footballer David Beckham did when he was playing for Real Madrid. Â He's not stupid (or at least his tax advisers are not stupid) so there must be a good reason why he elected to be taxed as a non-resident. Â In fact there are two:
1) the non-resident rate of tax is a flat 24,75% of income. Â Residents pay 24,75% at first, rising to 52%.
2) residents are taxed on their worldwide income, whereas under this law the beneficiaries only have to pay tax on the money they earn in Spain or other income that relates to Spain (capital gains, rent)
Why applying for Beckham treatment is not always such a great idea
The main reason is that although the non-resident tax rate stays at 24,75%, it does not come with any personal allowances. Â A basic rate taxpayer or even one paying the higher rates of 30% and 40% can pay less tax being taxed as a resident because the effect of personal allowances and deductions (see our guide to Spanish tax rates and allowances) offsets the higher marginal rates of tax. Â The effect is particularly pronounced in the first (and possibly last) year of residence, when the taxpayer is only earning in Spain for several months because, as residents, they get a full year of allowances to offset against a part year of income.
The second and slightly more subtle reason is that the worldwide income not taxed in Spain (probably) has to be taxed somewhere. Â If you have income besides that which you have earned from employment in Spain (e.g. a sponsorship deal) and it is taxed in Spain rather than another jurisdiction that might be a good thing rather than a bad thing. Â For example, the Spanish tax rate for interest and capital gains (21-27%) is among the lowest among major European countries.
Who can apply to be taxed as non-residents?
Luckily the law was not designed for footballers and any category of employee can claim to be taxed as non-residents. But they do have to be employees of a Spanish entity and perform most (85%) of their duties in Spain. The Spanish entity must have a physical presence in Spain. So if you are planning to base yourself in Spain but are actually self-employed or work mainly abroad then it will not beÂ possible to use this option. Another condition is that you must not have been resident in Spain during the past 10 years.
Weren't they going to abolish Beckham's Law?
The idea originally was that this would attract executives from around Europe to choose to come and work in Spain. The problem was that the very rich employees of football clubs and other stars got most of the benefits so the law became controversial. Unsurprisingly. Â Why should a millionaire foreign footballer pay a lower tax rate than an ordinary local worker who just scrapes into the higher rates of tax? The backlash against the law even made the pages of the Spanish football newspapers, who were worried that its abolition might make it harder for the big clubs to recruit top footballers from abroad.
Luckily for those wishing to take advantage of its provisions, the law was not abolished, merely modified. A cap of 600.000â‚¬ was placed on the maximum amount you could earn before the option was taken away. Unless you are a professional footballer, this is unlikely to be a problem for most of us. The new limit took effect for foreign workers entering Spain on or after 1 January 2010.
Full text of the law (Google translation)
a) Must not have been resident in Spain during the 10 years prior to his new assignment to Spanish.
b) The shift to Spanish territory must be the result of an employment contract. This condition shall be satisfied when you start a working relationship, regular or special, or status with an employer in Spain or when the movement ordered by the employer and there is a displacement of this letter, and the taxpayer does not obtain income that qualify as obtained through a permanent establishment situated in Spanish territory.
c) The work must be carried out in Spain. This condition shall be satisfied even if some of the works are rendered abroad, provided that the sum of salaries for those jobs with and without consideration of income obtained in Spanish territory in accordance with Article 13.1.c) of Consolidated Law on Income Tax Non-Residents, approved by Royal Legislative Decree 5 / 2004 of March 5, does not exceed 15 percent of all labor compensations paid in each calendar year. When under the provisions of the employment contract the taxpayer takes functions to another group company, on the terms established in Article 42 of the Commercial Code, outside Spanish territory, the previous limit was increased to 30 percent.
When unable to demonstrate the specific amount of remuneration for work done abroad, for calculating the remuneration for such work must take into account the days that the employee has actually been moved abroad.
d) The work must be done for a company or entity resident in Spain or a permanent establishment in Spain of a non-resident in Spanish.This condition shall be satisfied when services for the benefit of a company or entity resident in Spain or a permanent establishment in Spain of a non-resident in Spanish. In the case of displacement had occurred within a group of companies, under the terms established in Article 42 of the Commercial Code, and only for these purposes will require that the worker is hired by the group resident in Spain or there is a movement to Spanish territory ordered by the employer.
e) The earned income arising from the employment relationship are not exempt from taxation by the Income Tax Non-Resident.
f) That the remuneration expected under the contract of work in each of the tax periods in which special arrangements apply not exceed the amount of 600,000 euros.
Article 93. Taxation of displaced workers into Spanish territory.
Individuals who become tax resident in Spain as a result of their displacement into Spanish territory may opt to pay the income tax of non-residents, maintaining the status of taxpayers by income tax of natural persons, during the tax period in which the products are moving and over the next five tax periods, when, in the terms established by regulation under the following conditions:
- Other personal tax articles on this site: Â Spanish income tax ratesSpanish tax form 210Spanish taxation of married couples